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AA > Ch 11 - Reporting on an Audit Engagement > Flashcards

Ch 11 - Reporting on an Audit Engagement Flashcards

1
Q

What does ISA 260 deal with?

A

Auditors responsibility to communicate with chose charged with governance in an audit engagement

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2
Q

Who are those charge with governance?

A

The directors of a company

Members of an audit committee where one exist

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3
Q

What must the auditor ensure that those charged with governance with are provided?

A
  • copy of the engagement letter which will set out
    The form which communication to those charged with governance will take
    The appropriate persons to whom such communications will be made
    An explanation that only matters that happen to come to the auditor’s attention as a result of the perf of the audit will be communicated
    The auditor isn’t required to design procedures to identify matters of governance interest
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4
Q

What matters must be communicated to those charged with governance?

A

The responsibilities of the auditor in relation to the FS audit
An overview of the planned scope and timings of the audit
Significant findings from the audit
See Reports to Management Ch 12

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5
Q

What must be communicated to listed clients?

A

The responsibilities of the auditor in relation to the FS audit
An overview of the planned scope and timings of the audit
Significant findings from the audit
AND
Matters relating to auditor independence must also be communicated
Confirmation the audit team have complied with ethical requirements
Declaration of matters that may have a bearing on independence including disclosure of fees received for NAS from the client
Details of safeguards applied

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6
Q

How should auditors communicate with TCWG

A

Can be orally or in writing
But discussions should be documented in the working paper
Certain matters MUST be communicated in writing
Matters communicated to listed companies on the subject of independence
Significant deficiencies in internal control

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7
Q

Which matters must be discussed in writing with those charged with governance

A

Matters communicated to listed companies on the subject of independence
Significant deficiencies in internal control

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8
Q

What are the attributes of effective communication?

A

Timely
Appropriate extent, form and frequency
Fulfils the expectations of those charged with governance
Includes management comments where relevant
Repeat the previous year’s points where still unresolved and relevant
Includes a disclaimer so that third parties don’t rely on the communications

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9
Q

When should communications be documented?

A

Communications are a 2-way process: clients responses should be documented and responded to appropriately

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10
Q

What does an auditor give an opinion on?

A

Whether the FS are
True and fair
Properly prepared in acc with regs

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11
Q

How should an audit opinion be even?

A

Can’t be given verbally, must be in a written document

This written document will then become a public doc

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12
Q

What must be considered when giving audit opinion?

A

Not just looking at the numbers
Must also consider
If appropriate accounting policies and are adequately disclosed so users can understand whats going on
Are estimates reasonable
Are there any remaining material misstatement in the accounts

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13
Q

What is an unmodified opinion?

A

Nothing wrong with the accounts = unmodified opinion (T&F view)

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14
Q

What are the main guidances for audit reports

A

In June 2016, FRC issued new suite of reporting ISAs that are mostly in line with equiv int standards
UK picture is further complicated by the impact on UK statute and case law
Curent guidance on contents is
ISA 700 contents of standard audit reports
ISA 701 (UK): requirement to communicate key audit matters in the audit report
ISAs 705 (UK) and 706 (UK): modifications to the audit report
ISA 720 (UK): responsibilities in relation to other information published with the FS

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15
Q

What are the key sections of an audit report?

A 
Title 
Addressee
Auditor's opinion
Basis for opinion
GC 
Key audit matters
Application of materiality
Other info
Responsibility of management 
Auditor's responsibilities 
Opinion on other matters prescribed by CA2006 
Matters on which auditor is Required to report by exception
Sign-off
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16
Q

What is the audit report titled?

A

Independent Auditor’s Report

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17
Q

Who is the addressee?

A

SH

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18
Q

What is the ‘Auditor’s opinion’ made up of

A

Identify the statements covered by the auditor’s report
Provide the opinion
- T&F
- Properly in acc with relevant fin rep framework and CA2006

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19
Q

What is the basis for opinion in the audit report??

A

Refer to ISas, independence and ethical framework to provide a context for the opinion

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20
Q

What must you state in GC in the audit report?

A

Where applicable, report in accordance with ISA 570

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21
Q

What is reported in the KAM in the audit report??

A

A brief description of the matters that the auditor considers to be most significant during the audit (compulsory with listed companies) in accordance with ISA 701

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22
Q

What do you include in the application of materiality in the audit report?

A

An explanation of how the auditor applied the concept of materiality in planning and performing the audit

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23
Q

What do you include in the ‘other information’ section in the audit report?

A

Where applicable, report in accordance with ISA 720

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24
Q

What is included in the responsibilities of management section in the audit report?

A

Refer to the statement of directors’ responsibilities is included either in the directors’ report or as a separate statement

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25
Q

What is included in the auditor responsibilities section in the audit report?

A

Set out the objectives of the audit, emphasising that the auditor reports on the truth and fairness of the FS

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26
Q

What must be included in the ‘opinion on other matters prescribed by CA 2006’ in the audit report?

A

Report on whether the Strategic Report and the Directors’ report was consistent with the FS

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27
Q

What is included in ‘matters on which the auditor is required to report by exception’ part of the audit report?

A

UK auditors are required to identify the matters that are required by CA2006 to be reported on by exception

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28
Q

What is included when signing off an audit report?

A

Name of eng partner
Signature of eng partner
Auditor’s address
Date of the report (after man approve the FS)

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29
Q

What does CA require in an audit?

A

includes requirements that auditors report on certain matters other than the opinion on the FS

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30
Q

What will you be tested on re an audit report?

A

In the exam, you won’t be expected to write an audit report, but can expect to be tested on the implications of acc and auditing issues on the auditors report

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31
Q

What are key audit matters taken from?

A

(KAMs) are taken from the matters that the auditor has communicated to those charged with governance

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32
Q

What are KAMs?

A

those matters that auditor judges to have had the most significant impact on the overall audit strategy and the audit work carried out

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33
Q

When determine whether a matter is a KAM, what should the auditor consider?

A

High risk areas
Signif judgements made by man/auditor
The effect of significant events/transactions

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34
Q

What must the auditor provide for each KAM

A

A description of each KAM that sets out
Why the matter was considered to be significant
How it is addressed in the audit (the impact of this KAM on the audit strategy and approach)

35
Q

What should an auditor show in the report for materiality?

A

Auditor should also show how the auditor applied the concept of materiality to the audit

36
Q

Can a KAM be a substitute for giving a modified opinion?

A

NO

37
Q

What must an auditor report on relating to the Director’s report

A

Shows the auditor is required to report on whether the info contained in the Directors’ Report is consistent with the FS
If any inconsistency is identified, the auditor should ask directors to amend their report
If they fail to do so, the auditor should modify the opinion on the consistency of the Directors Report

38
Q

What matters are an auditor required to report on exception by?

A

CA2006 requires the auditor to report by exception in certain situations
Adequate accounting records have been kept
Returns adequate for the audit haven’t been received from branches not visited
The FS aren’t in agreement with the underlying records
Directors’ remuneration disclosures weren’t made
Info and explanation necessary for the audit weren’t received

39
Q

What is the mnemonic to help remember which matters need to be reported on by exception?

A 
RAPID 
Returns from branches not visited
Accounts agree with underlying records
Proper accounting records
Information and explanations
Director’s remuneration
40
Q

What is the Bannerman case?

A

it was held that the RBS was entitled to rely on the published FS of a company for the purposes of lending the company money

41
Q

What extra disclosure has the Bannerman case led to firms disclosing

A

Many auditors in the UK have since included an extra para, stating they don’t accept responsibility to anyone other than the company and the companies SH as a body

42
Q

What does CA 2006 require companies to include in annual report?

A

Corp Governance Statement

43
Q

What are auditors reporting responsibilities for UK Corp Gov?

A

Report by exception if no Corporate Governance Statement included
Report on the company’s compliance with the specific provisions of the UK Corp Governance Code

44
Q

What is a modified audit report?

A

one in which there is some kind of change to the standard ISA (UK) 700 audit report

45
Q

When are modifications used in an audit?

A

Modifications are used when the auditor wishes to communicate something of significance to the users of the FS

46
Q

What are the different potential audit opinions?

A

A modified report with an unmodified opinion
A modified report with a modified report
The details of the modification used will depend on the reason for modifying the report

47
Q

What is a modified report with an unmodified opinion?

A

This option would be used where
The FS do show a true and fair view, so the opinion is unmodified
BUT the auditor has something important to communicate to the users the FS
In this case, the auditor will include an additional paragraph in the audit report

48
Q

What are the 2 additional paragraphs that might be used in an audit report when there is a modified report?

A

Emphasis of matter paragraph

Other matters paragraph

49
Q

What is an Emphasis of matter paragraph used for?

A

Used to highlight a matter included in the FS which has been appropriately presented or disclosed, but which is fundamental to the understanding of the users of the FS

50
Q

How would you describe an emphasis of matter paragraph?

A

Is headed ‘Emphasis of matter’
Describes the matter and includes a reference to where disclosures can be found in the FS
States that the audit opinion isn’t modified in this respect

51
Q

Give some examples of things that would lead to an emphasis of matter paragraph

A

Material uncertainty concerning the outcome of litigation
Major catastrophe that has had a significant impact on the entity’s financial position
Subsequent events tare discovered after the date of the auditor’s report and the auditor provides a new/amended report

52
Q

What is the most common cause for an Emphasis of matter paragraph

A

outstanding court case that has been properly dealt with
Must’ve made a contingent provision/appropriate action
Placed directly after basis of opinion paragraph but ISA 706 (A16) allows some flexibility

53
Q

What are EoM paragraph NOT used for

A

Highlight immaterial misstatement
Highlight when disclosures are inadequate
this would require a modified report

54
Q

When do Emphasis of Matter and Other matter paragraphs appear in Audit report?

A

traditionally been directly following the Opinion paragraph

But the new format set in ISA 700 allows flexibility

55
Q

What is the use of the other matters paragraph?

A

Highlights matters not included in FS

i.e. audit responsibilities that had affected the audit in some way

56
Q

Describe the Other Matters Paragraph

A

An other matter paragraph
Is headed up by ‘Other matter’
Describes the matter

57
Q

Give an example of an Other Matters Paragraph cause?

A

The prior period FS were audited by the predecessor auditor, or weren’t audited at all, as required by 710 (13-14)

58
Q

Where do you find the Other Matters Para in the audit report?

A

Sits below the report on other regulatory matters in most cases

59
Q

What must an auditor do if they intend to include an Emphasis of Matter or Other Matter Para in audit report?

A

Where the auditor expects to include an Emphasis of Matter or Other Matter in the auditor’s report, the issue should be communicated with those charged with governance

60
Q

What are the 2 types of problem that leads to a modified report with a modified opinion

A

FS are misstated (the auditor disagrees with the directors over acc treatment or disclosure)

Auditor is unable to obtain sufficient appropriate evidence

61
Q

What opinions can be given when giving a modified opinion due to FS misstatement?

A

Qualified

Adverse

62
Q

When is a modified opinion classed as qualified?

A

if the problem is material but not pervasive

63
Q

What is the phrase for stating that a modified opinion is qualified?

A

‘In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the FS give a T&F view’ ISA (UK) 705 Appendix Illustrations 1 and 3

64
Q

When is a modified opinion classed as adverse?

A

if the problem is material AND pervasive

65
Q

What is the phrase for stating that a modified opinion is adverse?

A

Would say ‘does not show a true and fair view’
‘In our opinion, because of the significant of the mater described in the Basis for Adverse Opinion paragraph, the FS do not give a T&F view..’ (ISA (UK) 705 Appendix Illustration 2

66
Q

What is it known as when an auditor is unable to obtain sufficient appropriate audit evidence?

A

Limitation on scope

67
Q

What are the 2 options for when an audit is modified due to lack of evidence

A

Qualified or disclaimed

68
Q

When is a modified opinion given as a ‘disclaimer?

A

When the problem is material and pervasive due to lack of audit evidence

69
Q

What would you say when giving a disclaimer modified opinion?

A

‘we do not express an opinion’
‘Because of the significant of the possible impact of the uncertainties, described in the Basis for Disclaimer of Opinion paragraph, we do not express an opinion on the FS’ (ISA (UK) 705 Appendix illustrations 4 and 5

70
Q

Define pervasive

A

If it completely undermines the view given by the auditor

71
Q

Give an example of circs that mean things are pervasive in the accounts

A

Makes up a large proportion of accounts
E.g. turns a profit into a loss
Affects multiple balances
i.e. has to be v significant

72
Q

What changes in the audit report when there is a modified opinion?

A

Basis of opinion para takes on a new role

Name changes too

73
Q

What does the ‘Basis of opinion’ para do when there is a modified opinion?

A
  1. Explain the issue
    - Should be sufficiently detailed for SH to understand the problem
    - E.g. specific account that has been misstatement/how much
  2. Quantify the issue that has lead to the modification if possible
74
Q

What does the name of the Basis of Opinion para become?

A

Basis for Qualified Opinion Paragraph
Basis for Adverse Opinion paragraph
Basis for Disclaimer of Opinion Paragraph
NEVER called the Basis for Modified Opinion Paragraph
Always must say which type of opinion is being used

75
Q

What should an auditor do when she identifies misstatements or limitations scope?

A
  • Ask the client to make an adjustment to the FS where necessary
  • Consider materiality
  • Consider the impact on the audit opinion
76
Q

What are the 2 levels of significance for materiality per ISA 705?

A

Material (by size or nature)

Material and pervasive

77
Q

What does it mean if a misstatement is material and pervasive?

A

Is not confined to particular elements of the FS
Represents a substantial proportion of the FS
Is fundamental to the users’ understanding

78
Q

What must the auditor do if the client doesn’t make a required adjustment or if alternative evidence can’t be found?

A

Show a modified opinion

Explain a reason for the modification after the opinion in a ‘basis for modified opinion’ paragraph

79
Q

When are special considerations required for audits?

A

Some audit eng will deal with FS prepared under a diff basis of acc, or a single set of FS

80
Q

Give some examples of diff acc basis that acc could be prepared under

A

Prepared on a tax basis to accompany a tax return
Prepared using the financial reporting provisions of a regulator
Prepared on a cash basis to provide cash flow info to creditors

81
Q

What must be added to the audit report when preparing an audit under special consideration/

A

The auditor’s report should include an Emphasis of Matter paragraph highlighting the use of the special purpose framework

82
Q

Give an example of when companies require an audit of a specific element of FS or single FS

A

Externally managed assets and income of a private pension plan
Net tangible assets
A balance sheet

83
Q

Before accepting an appointment to audit a specific element of FS or since FS, what must the auditor consider? and why?

A

consider whether it is practical to carry out this work without auditing the complete FS

In some circumstances, the work required may be disproportionate to the part of the FS being audited

84
Q

What problems can arise from when some audit eng require the auditor to report on subject matter other than a full set of statements prepared under UK GAAP or IFRS

A

If a company prepares a set of statutory accounts AND a set of accounts using the relevant regulator’s rues, the users of FS might be confused and read the wrong set of accounts
If asked to audit a standalone BS, it might be difficult to form an opinion without considering the P&L, which isn’t actually part of the engagement

AA (8 decks)

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