Chapter 02 Basic Concepts Flashcards
LO 1: Complete set of financial statements include?
- Statement of financial position (ie. Balance Sheet)
- Statement of profit or loss, and Other Comprehensive income.
- Statement of changes in equity. 4. Cash Flow Statement
- Notes to the financialstatements.
LO 2: WHAT IS MEANT BY TRUE AND FAIR VIEW?
The term “true and fair view” or “fair presentation” has no legal definition. Generally: true means free from errors, and fair means free from undue bias in the preparation or presentation of financial statements. The phrase True and fair view indicates that judgment is applied in the preparation of financial statements by management, and in expressing opinionsbyauditors.
LO. 03
Difference b/w a fair presentation framework and a Compliance framework?
Fair Presentation Framework:
A fair presentation framework is a financial reporting framework that requires compliance with the requirements of the framework and contains an acknowledgment that, to achieve fair presentation, it may be necessary for management To provide: >disclosures in addition to specific requirements of the framework or >To depart from a requirement of framework. In the Fair presentation framework, the auditor expresses an opinion on whether “financial statements give the true and fair view in accordance with the framework, or “financial statements are presented fairly, in all material respects, in accordance with the framework. (Both phrases are equivalent)
An example is the International Financial Reporting Standards
Compliance Framework: Compliance framework is a financial reporting framework that requires compliance with the requirements of the framework, and does not contain acknowledgments which are contained in fair presentation framework (regarding additional disclosures or departure from requirements of framework to achieve fair presentation)
In the Compliance framework, the auditor expresses the opinion on whether “financial statements are prepared, in all material respects, in accordance with the framework” An example is Tax-basisFramework
LO. 03
What is AFRF?
Applicable Financial Reporting Framework (AFRf): AFRF is the financial reporting framework adopted by management and Those Charged With Governance (TCWG), in preparation of financial statements considering legal requirements, nature of the entity, nature of financial statements, and purpose of financialstatements.
LO. 04
RESPONSIBILITIES OF MANAGEMENT AND TCWG?
- For preparation and presentation of financial statements in accordance with AFRF (This includes identifying AFRF preparing financial statements in accordance with AFAF applying appropriate accounting policies and reasonable estimates)
- For design, implementation and operating effectiveness of internal controls which are necessary for the preparation of reliable F/S.
- To provide auditor with:
>all relevant information >additional information requested by auditor, and
>unrestricted access to persons within the entity to obtain evidence
Management is also responsible for specific responsibilities e.g
to prevent and detect fraud, and to provide written representation to auditor atendofaudit.
LO. 05
OVERALL OBJECTIVES (OR RESPONSIBILITIES) OF AUDITOR/AUDIT?
The overall objectives of the auditor is:
>To obtain reasonable assurance whether financial statements are free from material misstatement (whether to error or fraud),
>To report on financial statements which include the auditor’s opinion, and
>to communicate auditors finding as required by ISAs (eg to directors,regulators)
LO. 06
RESPONSIBILITIES OF STAKEHOLDERS?
It is the responsibility of stakeholders to understand and eliminate the expectation gap so that scope of audit is not misunderstood.
LO. 06
what is EXPECTATION GAP and Common misunderstandings?
Expectation gap means public perception of the role and responsibilities of the external auditor is different (and is usually higher) from his statutory role and responsibilities
Some Common Misunderstandings (ie. Expectation Gap) about Audit
1. The auditor prepares financial statements.
2. Auditor checks 100% of transactions of the entity during the accounting period.
3. Auditor provides absolute assurance (ie. he certifies or guarantees that financial statements are correct in all respects, and can be relied upon for all decision-making purposes). 4. Auditor is responsible to prevent and detect fraud.
5. Auditor is responsible to express opinion on internalcontrols.
Explain Professional Judgment.
and areas where auditor applies it.
Professional Judgment: is the application of cumulative audit knowledge, experience and training to reach an appropriate course of action or conclusion during an audit.
Areas where Professional Judgment is applied in:
>Planning of audit (e.g in risk assessment, in determination of materiality).
>Performance of audit (e.g. in deciding nature, timing, and extent of audit procedures (in evaluating sufficiency and appropriateness of audit evidence).
>Reporting stage (in drawing conclusions based on evidenceobtained)
Explain Professional Skepticism.
Professional Skepticism: Professional skepticism is a questioning mind, attitude that includes being alert to conditions that indicate possible misstatement (due to error or fraud). and critical assessment of audit evidence. Even if management has shown honesty and integrity in the past, the still auditor shall apply professional skepticism in planning and performing the audit.
Reasons/advantages/importance of Professional skepticism.
It ensures that the auditor does not:
>Overlook unusual circumstances. >Use inappropriate assumptions in determining audit procedures, and evaluatingresults.
and it helps in the identification of risk and to obtain evidence.
Briefly describe Independence?
and give examples of situations causing threats to independence
Independence means the auditor should be free to perform audit procedures without any bias or influence. The auditor should be Independent of financial, personal, and employment relations with the client.
Some examples of situations causing threat to independence are:
>Inducements
>Financial interests
>Business relationships
>Family and personal relationships >Employment with audit client
