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Auditing HSG > Brush ups > Flashcards

Brush ups Flashcards

1
Q

Name the major benefits derived from planning audits?

A
  • Keep audit costs reasonable
  • Obtain sufficient competent evidence
  • Minimize legal liability
  • Avoid misunderstanding with the client
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2
Q

Name the analytical procedures used in various phases of the audit process:

A
  • Compare client and industry data (second exercise) (e.g. understand the business and industry, look at ratios of the industry)
  • Compare client data with similar period (and client?) data
  • Compare client data with client determined expected result (budget of client)
  • Compare client data with audit determined expected results (before you audit you have an expectation, if it differs, you should know or investigate why)
  • Compare client data with expected results using non-financial data (look at the environment, maybe competitors and so on, not related to the numbers)
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3
Q

Discuss the combined provision of consulting and auditing for the same client

A

Disadvantage: Impair audit objectivity (Might not be fully independent)

Advantage: Efficiency might be gained by better knowledge of the company

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4
Q

The definition of control environment according to internal control, and elements that identifies it

A

Control environment is the foundation of other components, and it provides an atmosphere were people conduct their activities and carry out their responsibilities.

Elements that identify the control environment:

  • Integrity, authority, responsibility, organizational structure, management philosophy (Tone at the top)
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5
Q

Describe the three board objectives management have for internal controls (internal control framework):

A
  • Compliance with law and regulation
  • Efficiency and effectiveness of operations
  • Reliability of financial reporting
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6
Q

Explain why materiality is important but difficult to apply in practice?

A
  • If the financial statements are misstated user decisions might be affected (i.e. this will lead to financial loss for these users)
  • Difficult to apply since it is often many different users of the financial statements
  • You as an auditor must make an assessment of the likely users and the decisions they will make
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7
Q

Explain the purpose of, and procedures for, obtaining written representation from management

A
  • Written representation is necessary information the auditor needs in connection with the audit of the entities’ financial statement.
  • Also required to confirm director’s responsibility
  • Supply all the evidences needed or required by other ISA-standard
  • Management have communicated all the efficiency in internal control
  • Normally in the form of a letter written and signed by the company’s director to the auditor
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8
Q

Identify procedures an auditor should perform in determining whether to accept a client (new or continuing)

A

New client: Information about the clients corporation, communicate with previous auditor, enquire lawyers and law firms, registration banks and so on e.g. risky industry, do you have skills in it (focus on information about the corporation)

Continuing client: Annual review, look at complete audit such as fees, valuation, report, enough time to finish, risky industry, do you have skills in it

Both: Obtain an engagement letter before you start working

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9
Q

State the purpose of an engagement letter

A

Two very important ones:

  • Written agreement with terms of engagement
  • Avoid misunderstandings
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10
Q

Name three reasons why an auditor may not wish to continue to audit the financial statement of an existing audit client

A
  • Previous conflicts over accounting issues (e.g. scope of audit, type of opinion, fees, management integrity)
  • Legal action
  • Excessive risk
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11
Q

How do you communicate to your client why you are only looking at a sample of transactions instead of all of them? (several possible answers but some are more correct than others)

A
  • Decreased costs
  • Time efficiency
  • Not possible to audit whole population therefore representative samples instead
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12
Q

State what is meant by a representative sample and explain its importance in sampling audit populations?

A
  • A representative sample is one in which the characteristics of interest for the sample are approximately the same as for the population
  • If the population contains significant misstatements, but the sample is practically free of misstatements, the sample is non-representative, which is likely to result in an improper audit decision.
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13
Q

Explain the major difference between statistical and non-statistical sampling. What are the three main parts of statistical and non-statistical methods?

A

Statistical sampling is the use of mathematical measurement techniques to calculate formal statistical results.

In non-statistical sampling, the auditor does not quantify sampling risk. Instead. Conclusions are reached about populations on a more judgmental basis

For both statistical and non-statistical methods, the three main parts are

  • Plan the sample
  • Select the sample and perform the tests
  • Evaluate the results
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14
Q

Distinguish between a sampling error and a non-sampling error. How can each be reduced?

A

Sampling error simply means that the sample is not perfectly representative of the entire population

Non-sampling error occurs when audit tests do not uncover errors that exist in the sample. Non-sampling errors can result from:

  • Auditors failure to recognize exceptions
  • Inappropriate of ineffective audit procedures
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15
Q

How many types of audits are possible in Switzerland?

A

Ordinary auditor Limited statutory examination

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16
Q

Which companies are required to conduct an ordinary audit?

A
  • Public companies
  • Economically significant companies (two of three fulfilled: Assets 20M, Sales 40M, 250 employees)
  • Companies that require consolidated accounts
  • Shareholders (min 10%) request it
  • Decisions of the articles of the association or the general meeting
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17
Q

Why do companies perform limited statutory examination instead of ordinary audit?

A
  • Economically burdensome for small firms
  • Time consuming
  • Benefit
18
Q

What are the two kinds of independence? What are their characteristics?

A

Independence in mind:

  • The state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional skepticism.
  • Determined by e.g. ethics, personal character and professional experience

Independence in appearance:

  • Result of others’ interpretations of independence of mind/fact
  • Achieved through avoidance of circumstances that create doubt
19
Q

Shall an auditor, who conducts limited statutory examinations be independent?

A

Yes, but the auditor could be involvement in the accounting of the company and the involvement in other services for the company are allowed. If there is a risk that the auditor controls his own work, adequate organizational measures have to be put in place to ensure a reliable audit.

20
Q

Distinguish among the following three risks: Risk-free interest rate, business risk, and information risk. Which one or ones does the auditor reduce by performing an audit? (The independent risks are not very important, but we should know which one is relevant)

A

Information risk, this risk reflects the possibility that the information upon which the business risk decision was made inaccurate. A likely cause if the information risk is the possibility of inaccurate financial statements

(Auditing has no effect on either the risk-free interest rate or business risk. However, auditing can significantly reduce information risk)

21
Q

Identify ways in which financial statement audit adds value for clients

A

Financial statement audits reduce information risk, which lowers borrowing costs. An audit also provides assurances to management about information used for decision making purposes, and may also provide recommendations to improve efficiency or effectiveness of operations.

22
Q

List other services than audits that an audit firm is likely provide

A

Auditing firms likely provide:

  • Tax services
  • Accounting services
  • Management consulting.

They may also provide additional assurance and attestation services other than audits of financial statements.

23
Q

Accepting a client? (in the auditors personal point of view)

A
  • Is competent enough to perform the engagement and has the capabilities, including time and resources.
  • Can comply with relevant ethical requirements
  • Has considered the integrity of the client, and does not have information that would lead it to conclude that the client lacks integrity
    Such procedures require:
  • Obtain such information as it considers necessary
  • Potential conflict of interest is identified
  • If issues has been identified
24
Q

Activities an auditor should perform before accepting a client? Which ones are required?

A
  • Evaluate the integrity of client management (Required)
  • Determine the independence of your firm with respect to the client (Required)
  • Obtain and review client financial information such as annual reports
  • Communicate with the predecessor auditor after receiving permission from the client (Permission – You are going to but it is not required)
  • Inquire of third parties about the client (banks, lawyers, credit agencies etc)
25
Q

Which financial ratios should an auditor use before accepting the client?

A

ROE=(Net Earnings)/(Shareholders Equity)

ROA=(Net Earnings)/(Total Assets)

Assets to equity=(Total Assets)/(Total Equity)

Inventory Turnover=(Cost of Sales)/(Raw Material+Finished goods)

Days in inventory=365/(Inventory Turnover)

Debt Ratio=(Total Liabilities)/(Total Assets)

Debt to Equity=(Total Liabilities )/Equity

Times interest earned=(Operating income (EBIT))/(Interest expenses)

Current Ratio=(Total current assets)/(Total current liabilities)

Profit Margin=(Operating Income)/Sales=NetIncome/NetSales

26
Q

Describe the three broad objectives management has when designing effective internal control:

A

Management typically has three broad objectives in designing effective internal controls:

  1. Reliability of financial reporting
  2. Efficiency and effectiveness of operations
  3. Compliance with laws and regulations
27
Q

What are the components of internal control in the COSO internal control framework?

A

The COSO internal control – integrated framework consists of the following five components:

  1. Control environment
  2. Risk Assessment
  3. Control Activities
  4. Information and communication
  5. Monitoring
28
Q

List the categories of control activities and provide one specific example of a control in the sales area for each control activity:

A

The five categories of control activities are (and a following explanation):

  • Adequate separation of duties.
  • Proper authorization of transactions and activities
  • Adequate documents and records
  • Physical control over assets and records
  • Independent checks on performance.
  • Adequate separation of duties. Processing, customers order and billing is performed by different people.
  • Proper authorization of transactions and activities. What kind of customer is this? Is it a new one? You might want to be paid beforehand.
  • Adequate documents and records. If you have a shipment that was made, you need a shipment document that is authorized and approved.
  • Physical control over assets and records. Password might be required, e.g. three people have access and they are the only ones that can make changes
  • Independent checks on performance. Verify prices and amount before the shipping goes to the client.
29
Q 
For each of the following, give an example of a physical control the client can use to protect the asset or record:
•	Petty cash
•	Cash received by retail clerks
•	Accounts receivable records
•	Raw material inventory  
•	Manufacturing equipment 
•	Marketable securities
A

– Keep locked in a fireproof safe

– Entered into a cash register to record all cash received

– Stored in a locked, fireproof safe. Adequate backup copies of computerized records should be maintained and access to the master files should be restricted via passwords

  • Retained in a locked storeroom with a reliable competent employee controlling access

– Kept in an area protected by security and fire alarms and kept locked when not in use

– Marketable securities should be stored in a safety deposit vault.

30
Q

State the objective of the audit of financial statements. In general terms, how do auditor’s meet the objective?

A
  • Objective is the expression of an opinion on the fairness with which the financial statements present financial position, results of operations, and cash flows in conformity with applicable accounting standards.
  • The auditor meets that objective by accumulating sufficient appropriate evidence
31
Q

Distinguish between the management’s and auditor’s responsibility for the financial statements being audited

A

Management’s responsibility:

  • Adopt sound accounting policies
  • Maintain adequate internal control
  • Make fair representations in the financial statements

Auditor’s responsibility:

  • Conduct audit of the financial statements in accordance with auditing standards
  • Report findings from the audit to the audit report
32
Q

Describe what is meant by cycle approach to auditing. What are the advantages of dividing the audit into different cycles?

A

The cycle approach is a method of dividing the audit so that closely related types of transactions and account balances are included in the same cycle

Advantages:

  • Divided into more manageable parts
  • Easier to assign members of the audit team to different areas
  • Enables you to keep closely related parts of the audit together
33
Q

Identify the cycle to which of the following general ledger accounts will usually be assigned:

  • Sales
  • AP
  • Retained earnings
  • AR
  • Inventory
  • Repairs & maintenance
A
  • Sales -> Sales and collection
  • AP -> Acquisition and payment
  • Retained earnings -> Capital acquisition and repayment
  • AR -> Sales & Collection
  • Inventory -> Inventory and warehousing
  • Repairs & maintenance -> Acquisition and payment
34
Q

Distinguish between the general audit objectives and management assertions. Why are the general audit objectives more useful to auditors?

A
  • General audit objectives are intended to provide a framework to help the auditor accumulate sufficient appropriate audit evidence. Audit objectives are more useful to auditors than assertions because they are more detailed and more closely related to helping the audit accumulate sufficient appropriate evidence
35
Q

An acquisition of a fixed asset repair by a construction company is recorded on the wrong date. Which transaction related audit objective has been violated? Which transaction related audit objective would be violated if acquisition had beed capitalized as a fixed asset rather than expensed?

A
  • Acquisition of a fixed asset repair by a construction company is recorded on the wrong date: TIMING
  • Acquisition had beed capitalized as a fixed asset rather than expensed: CLASSIFICATION
36
Q

Distinguish between the existence and the completeness related audit objectives

A
  • The existence objective deals with whether amounts included in the financial statements should actually be included
  • The completeness objective deals with whether all amounts should be included have actually been included
37
Q

What is the relationship between materiality and the phrase “Obtain reasonable assurance” used in the auditor’s report?

A

“Obtain reasonable assurance” as used in the audit report means that the auditor does not guarantee or ensure the fair presentation of the financial statements. There is some risk that the financial statements contain a material misstatement

38
Q

Explain why materiality is important but difficult to apply in practice

A

Materiality is important since if financial statements are materially misstated, users decisions might be affected, and thereby cause financial losses to them. It is difficult to apply because there is often many different users of financial statements. The auditor must therefore make an assessment of the likely users and the decisions they might make.

39
Q

Identify the most important factors affecting preliminary judgement

A
  • Materiality is a relative rather than absolute concept
  • Benchmarks are needed for evaluating materiality
  • Qualitative factors affect materiality decisions
  • Expected distribution of the financial statements will affect the preliminary judgment of materiality
  • The level of acceptable audit risk will also affect the preliminary judgment of materiality
40
Q

What should you do if there is an overstatement above the performance materiality? (e.g. 55’ AR instead of AR-PM 40’)

A
  • Document the misstatement and evaluate results of remaining audit procedures in AR. The finding will be example of “known overstatement”
  • The auditor could request the client to make an adjustment to correct the overstatement or make a note of the overstatement for follow-up later in the audit
  • If the AR testing was performed using sampling techniques, the auditor would also project total known misstatements to the population and may perform additional tests depending on the outcome

Auditing HSG (7 decks)

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