Chapter 1 - Intro to AA Flashcards
What are the key differences between reasonable and limited assurance engagements?
reasonable assurance is the highest level assurance because the auditor does extensive testing and provides a positive opinion that the statements are ‘true and fair’ ie the statements are accurate. An example of a high level assurance engagement is audit of the FS.
limited assurance provides a lower/moderate level of assurance as the auditor does less extensive work and completes less procedures. The conclusion is thus a more cautious, negative opinion, ie ‘nothing has come to my attention’. An example is a review of the FS
What are the benefits of assurance to the users?
The information is more credible, there is a reduced risk of management bias, error or fraud, and it sheds light on any deficiencies on the areas being reported on
What are the overall objectives of ISA 200?
ISA 200 sets out the objectives of the auditor when reviewing the financial statements. They aim to obtain reasonable assurance the the FS are free from material misstatement and are prepared in accordance with the financial accounting frameworks. (international/uk). Upon reviewing the statements, the auditor provides a report of their findings to those charged with governance - i.e. managers/directors.
What is the audit threshold outlined by the Companies Act 2006?
The companies act exempts small PLC’s from a mandatory audit if they fit 2/3 of the following criteria; Annual turnover doesn’t exceed 10.2m, no more than 50 employees and gross assets don’t exceed 5.1m. However, some small PLC’s are still required to do an audit if they are a bank, insurance company or a PLC where shareholders of more than 10% that ask for an audit.
What other companies are exempt from a mandatory statutory audit?
Subsidiary companies are exempt from an audit if their parent company guarantee their liabilities, meaning they take legal responsibility for the subsidiary’s debts and liabilities. Companies that take advantage of the exemption must disclose it in their FS.
What are the benefits of an audit?
An audit provides scrutiny of the business by professionals - providing professional skepticism and objectivity. Assurance may be required by third parties - i.e. a bank may request one before issuing a loan. The requirement of an audit promote discipline over maintaining the FS and reduces the risk of misstatement and non compliance with the statutory responsibilities. Audits provide reports to those charged with governance outlining deficiencies in internal controls - can reduce risk.
Describe the scope of an audit as outlined in ISA 500?
ISA 500 covers the basis of audit procedures. The auditor inspects invoices, tangible assets etc to see if they match the information in the statements. They then observe the procedures of the company i.e. how cash is handled. The auditor then confirms information such as whether bad debts have been paid. They also recalculate certain figures such as depreciation to confirm there are no misstatements. Auditors also reperform particular procedures to see if they achieve the same outcome as those stated in the FS. Auditors carry out analytical procedures such as monitoring growth of sales to spot any inconsistencies. Finally the auditor inquires about particular info to mgmt to gain context and understanding to ultimately form an audit opinion.
Discuss the scope of other assurance engagements?
The scope of an audit engagement is determined by the terms of the engagement and relevant ISAEs and ISREs.
Like a statutory audit, will consist of inspection of records and inquiry to mgmt about particular procedures but will also consist of a written letter of representation from mgmt - i.e. signed documents from those charged with governance confirming that the information reported is true.
What are the differences between statutory audits and other insurance engagements?
statutory
- reasonable assurance
- report to shareholders
- report on the FS and whether the strategic/ director’s reports are consistent with the FS
- in public domain once published
other engagements
- limited assurance
- report to mgmt
- report on work provided
- typically only available to mgmt
