Chapter 1 - Principles of auditing

Question 1

Definition of Assurance

Answer 1

Practitioner expresses expert opinion that enhances the confidence of users other than the responsible parties.

Question 2

Definition of External Audit

Answer 2

Type of Assurance engagement in which a positively expressed opinion that the Financial Statements provide a True and Fair view of affairs as at the period end date in accordance with the applicable accounting standards.

Question 3

Criteria for compulsory External Audit?

Answer 3

£10.2m Turnover
£5.1m Gross Assets
50 Employees

Question 4

Benefits of Audit

Answer 4

Adds credibility to financial statements
Independent Verification
Acts as Fraud Deterrent
Internal Controls are assessed

Question 5

Limited level of assurance?

Level, Example of engagement, Level of work, Example of wording

Answer 5

Level - Moderate (negatively expressed opinion)
Example of engagement - Report effectiveness of internal controls, Review Business Plan
Level of work - Limited procedure
Audit wording - ‘Nothing has come to our attention that indicates the internal control systems are not operating effectively’

Question 6

Reasonable level of assurance?

Level, Example of engagement, Level of work, Example of wording

Answer 6

Level - High (positively expressed opinion)
Example of engagement - Statutory audit
Level of work - Thorough procedure
Example of wording - ‘Show True and Fair view’

Question 7

When does an auditor give 100% assurance?

Answer 7

NEVER

• Evidence is persuasive not conclusive
• Auditors don’t test everything
• Areas of judgement (subjective therefore can never be 100% accurate)
• Inherent limitations internals controls and accounting systems
• Auditors test according to materiality

Question 8

What makes up Financial Statements?

Answer 8

Statement of Profit or Loss
Statement of Financial Position 
Cash Flow Statement
Statement of Changes in Equity
Notes to all the above

Question 9

Responsibilities of a Director

Answer 9

• Prepare Financial Statements
• Prevent/Detect fraud
• Safeguard company’s assets
• Maintain adequate accounting records

Question 10

Responsibilities of Auditor

Answer 10

Give opinion on Financial Statements

Question 11

What is the type of assurance is provided by an Auditor

Answer 11

Reasonable

- Never abosolute

Question 12

Companies Act 2006 requires notes to state

Answer 12

• whether accounts have been prepared in accordance with applicable accounting standards
• Reasons for material departure from accounting standards

Question 13

What is materiality?

Answer 13

Concept that determines the maximum error that the auditor is prepared to accept and still be satisfied that the statements show a true & fair view.

Question 14

Material errors may be qualitative or quantitative, what is meant by this?

Answer 14

Qualitative - Material by nature not amount e.g. transactions with related parties are always material by nature regardless of the amount.

Quantitive - Material by amount e.g. larger than 1% of Turnover.

Question 15

Process of an Audit

Answer 15

1. Engagement letter
2. Planning
3. Ascertain accounting systems
4. Test controls and transactions
5. Verify assets and liabilities
6. Review financial statements
7. Obtain written representations
8. Sign auditors report
9. Reappointment of Auditor