Chapter 1 Concept of and need for assurance

Question 1

For a statutory audit assignment, list the following:
 The 3 parties involved.
 The subject matter.
 The suitable criteria.
- evidence 
- written report

Answer 1

 The 3 parties = auditor, directors, shareholders.
 The subject matter = the financial statements.
 The criteria = law and accounting standards
- evidence = sufficient and approproate
- written repotr = conlusion or opinion

Question 2

How is limited level of assurance defined and when is it used?

Answer 2

i. Moderate/low level of assurance
ii. Conclusion expressed negatively
iii. e.g. an engagement to review interim accounts
A sample sentence,Nothing has come to our attention that it does not give a true and fair view

Question 3

How is reasonable insurance defined and for what document is it used?

Answer 3

i. High but not absolute level of assurance
ii. Conclusion expressed positively
iii. e.g. Audit of Fin statement
Sample sentence: That FS show true and fair view

Question 4

Where else is the assurance engagement used aside from statutory audit and fraud investigations?

Answer 4

 Statutory audit
 Fraud investigations
 Due diligence
 Internal controls assessment
 Business plan/projection reviews
 Environmental audits.

Question 5

What are the auditors general objective?

Answer 5

 obtain reasonable assurance about whether the financial statements free from material misstatement, due to fraud or error
 express an opinion on whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting
framework.

Question 6

What is the minimum size of a firm for an auditor to come?

Answer 6

After 01 Jan 16
Employees No more than 50
Turnover Does not exceed £10.2m
Total assets Does not exceed £5.1m

Question 7

What does auditor must do to be be a member of Recognised
Supervisory Body (RSB)

Answer 7

 Individuals holding an
appropriate qualification or
 Part of a firm controlled by
qualified persons.

Question 8

How is an auditor ineligible to be auditor

Answer 8

 if they are an officer or employee of the
company
 if they are a partner or employee of the
above.

Question 9

What does the auditor have to comply with?

Answer 9

• Comply with relevant ethical requirements.
  Professional scepticism is an attitude that includes a questioning mind,
  being alert to conditions which may indicate possible misstatement due
  to error or fraud, and a critical assessment of audit evidence.
• Professional judgement is the application of relevant training,
  knowledge and experience in making informed decisions about the
  courses of actions that are appropriate in the circumstances of the audit

Question 10

Why is assurance important?

Answer 10

 Independent scrutiny of the business by experts
 Added credibility
 By-products/subsidiary benefits (e.g. fraud deterrent)
 Draws attention to issues (including ethical issues)
 Reduces risk of management bias.

Question 11

What is the limitation of assurance?

Answer 11

 Sampling – we do not review 100% of transactions
 Inherent limitations of systems that produce the financial information
 Evidence is generally persuasive not conclusive
 Collusion to defraud
 Financial information includes subjective and judgemental matters
 Use of management representations as evidence may be unavoidable.

Question 12

What is the expecation gap?

Answer 12

 The auditor detects all fraud and error
 The auditor tests 100% of transactions
 The auditor verifies the accuracy of the financial statements
 The company is guaranteed to continue to trade for the foreseeable future if a
true and fair opinion is issued
 The Statement of Financial Position shows the true value of the company.

Question 13

What is professional scepticism for an auditor?

Answer 13

questioning mind, being alert to error and fraud

Question 14

what is professional judgement for an auditor?

Answer 14

applying relevant training, knowledge and experience to make informed decision