Chapter 1-4 Flashcards
What is reasonable and limited assurance is given for? What type of engagement?
Reasonable assurance - statutory audit
Limited assurance - Review of forecast for due diligence
Three key elements of assurance.
Practitioner- expert who gives conclusion
Intended user- person relying on financial statement, such as shareholder
Responsible party - people who prep the information such as directors?
What is the subject matter suitable criteria, evidence and written report
Subject matter is the financial statement
Suitable criteria is the accounting standards or IAS
Evidence needs to be sufficient and appropriate
The written report is the conclusion given on other assurance engagement, whereas an opinion is given in an audit
Give an example of limited and reasonable assurance
“ nothing has come to our attention”
“ financial statement is true and fair”
When is an audit not mandatory according to the companies act for a limited company?
When 2/3 satisfied
- less than 50 employees
- Less than £10.2 million turnover
- Less than 5.1 million assets.
Benefit of assurance
Independent scrutiny
Added credibility
Reduce the management bias
Attention to issues
Limitations of assurance
Sampling
Financial information includes objective matters
Evidence is persuasive, not conclusive
Factors to consider before acceptance
LERP
Legal, ethical, risk, practical (adequate resources?)
What is included in the engagement letter?
Objective of work management responsibilities, scope of work, level of access to books and records and reporting framework
May include limitations and fee calculation
Audit strategy compared to audit plan
Audit strategy determines the scope and is a high-level plan. It includes understanding the entity, materiality nature and timing of audit procedure.
Audit plan is a higher level of detail, including who will be tested. What will be tested, and when. Ensures attention is paid to important areas and problems are identified.
What is an analytical procedure?
Comparison, it includes comparing actual with forecast and company ratios with industry averages
What is the benchmark materiality?
PBT- 5 to 10%
Revenue - 0.5 to 1%
Total assets - 1 to 2%
What is an inherent risk and what are the three levels?
The risk that the misstatement occurred before the audit began
Industry level, entity level, balance level (affects only balances such as inventory)
What is a related party and when is it material by nature? What are the problems with this?
Related party is a person who is influenced or has influence over client
Transactions with client are the reasons beyond normal activities need to be disclosed as material by nature
Generally, it is fine to deal with a related party however, directors may be reluctant to disclose transactions
What is the difference between current and quick ratio and what is the formula?
Current ratio is ability to pay for liabilities using readily liquid assets. Quick does not include inventory.
It is calculated as
current assets / current abilities
