chapter 1 reintroduction to audit and assurance

Question 1

Assurance engagement

Answer 1

engagement where a PRACTITIONER aims to obtain SUFFICIENT and APPROPRIATE audit evidence,

to express a conclusion to ENHANCE the degree of CONFIDENCE for the INTENDED USERS other than the RESPONSIBLE PARTY about the SUBJECT MATTER

Question 2

what are the Elements of an assurance engagement ?

7 total

Answer 2

• Responsible party - Directors
• Practitioner- Auditor
• User- shareholders
• subject matter- FS
• Criteria - UK GAAP
• Sufficient appropriate evidence
• written report with conclusion

Question 3

types of assurance ? what levels of assurance do they give? how are they expressed? Examples?

also how might they be worded?

Answer 3

Reasonable - High - Positive - Audit of financial info

“in our opinion management has operated an effective system of internal control”

Limited- moderate-negative- Review of financial information

“nothing has come to our attention that indicates material control weaknesses”

Question 4

Benefits of assurance to USERS and WIDER MARKET SHARE (3 each)

Answer 4

provided by independent professionals giving an objective unbiased opinion, give the following benefits to USERS:
-Enhanced credibility

• Reduces risk of management Bias, error or fraud in the info being reported on
• Draws attention to the user of any deficiencies in the info

WIDER MARKET:
-Ensure that high quality, reliable information circulates in the market

• Give investors added faith in the market
• Improve the reputation of organisations trading in the market

Question 5

Definition of an Audit? (which ISA, what are the objectives)

Answer 5

ISA (UK) 200

• To obtain REASONABLE ASSURANCE about whether the FS as a whole are free from material misstatement, whether due to fraud or error- enabling the auditor to EXPRESS an OPINION on whether the FS are prepared in all material respects, in accordance with an applicable financial reporting framework; and
• To report on the FS and communicate as required by the ISAs(UK), in accordance with the auditors findings.

Question 6

Audit threshold? who’s exempt? when must a company under the threshold be audited?

Answer 6

Exempt if:

• No more than 50 employees
• Turnover less than £10.2m
• Gross assets less than 35.1m

Subs exempt if parent guarantees its liabilities

if under threshold must be audited if:

• Articles of association say so
• Shareholders owning at least 10% of shares ASK FOR ONE
• Non dormant public company
• Insurance or banking

Question 7

Benefits and drawbacks of being audited

Answer 7

adv:

• MGMT value additional scrutiny by professional eyes
• Additional assurance to 3rd parties on reliability of FS (eg tax authorities)
• Growing business will one day require an audit
• Subsidiary benefits (recommending improvements in company systems)

Disadvantages:

• cost
• staff time required (providing info)
• Disruption to clients business
• Time spent on initial appointment process
• Dealing with confidentiality
• Expectations gap (particularly fraud detection)
• Inherent limitations of audit

Question 8

differences of nature of work undertaken between ISA (UK) 500 ISRE 2400 and ISAE 3400, (what are each of these codes for?)

Answer 8

ISA UK 500 - international standards on auditing :

• inspection of documentation
• Inspection of assets
• Observation
• External confirmation
• Recalculation
• Reperformance
• Analytical procedures
• Inquiry

ISRE 2400- International standard on review engagements: based on testing and verifying historical info

• inquiry (eg accounting principles in place, accounting systems in use, and concerning material assumptions)
• Analytical procedures (prior period comp, comp with anticipated results, analysis of expected patterns in elements of FS)

ISAE 3400: prospective info- scrutinising MGMT assumptions, rely on written rep rather than obtaining evidence through direct testing.

• Assessment of assumptions
• Recomputation
• Written representations

Question 9

difference in the quality and nature of evidence

Answer 9

• Far less evidence collected in review assignment, also less reliable since most reliable sources (eg third party confirmation) are not required
• sometimes the subject matter can affect the quality and nature of evidence- e.g. review of forecast figures to potential lenders- analytical procedures will be involved but there will be uncertainty as they are based on figures and transactions some of which will not have yet occurred.

-