Chapter 1: Reintroduction to audit/assurance

Question 1

What is an assurance engagement?

Answer 1

Practitioner expresses a conclusion designed to enhance degree of confidence of intended users about outcome of evaluation/measurement of subject matter against criteria

Question 2

What are the two types of assurance engagement?

Answer 2

Reasonable assurance and limited assurance

Question 3

Describe the evidence sought/opinion given for reasonable assurance.

Answer 3

Sufficient and appropriate, positive opinion (‘true and fair’)

Question 4

Describe the evidence sought/opinion given for limited assurance.

Answer 4

Sufficient and appropriate (less intrusive), negative conclusion (‘nothing has come to our attention’)

Question 5

Give six examples of stakeholders

Answer 5

SH, Directors, Customers/Suppliers, Lenders/Banks, Employees, Society

Question 6

Give benefits of AA to SHs.

Answer 6

Enhanced credibility of information, reliable (can hold management to account), draws attention of user to any deficiencies

Question 7

Give benefits of AA to directors

Answer 7

Reduced management bias risk, deter fraud, enhanced reliability of info, management letter provides constructive advice re: internal controls/risk management which leads to efficiency

Question 8

Give benefits of AA to customers/suppliers

Answer 8

FS could impact a decision to trade with a company, audit may give confidence

Question 9

Give benefits of AA to lenders/banks

Answer 9

Value of having business examined by professionals, lender has more confidence so company can raise finance more easily, bank appreciates risk better

Question 10

Give benefits of AA to employees

Answer 10

Greater confidence over job security and bonuses payable if profit linked

Question 11

Benefits of AA to society

Answer 11

Ensures high quality reliable info circulates in market, improves reputation of company, additional assurance to TPs such as tax authorities re: FS reliability

Question 12

What are the overall audit objectives?

Answer 12

To obtain reasonable assurance that FS as a whole are free from mat mis whether due to fraud or error. To express an opinion on whether the FS are prepared in accordance with applicable financial reporting framework.

Question 13

List the three criteria of which a small company must satisfy 2 of 3 to be exempt from mandatory audit.

Answer 13

No more than 50 employees, turnover does not exceed 10.2m, gross asset total does not exceed 5.1m

Question 14

Even if a company comes under the threshold required for a mandatory audit, it may still require one. List 4 situations where this may be the case.

Answer 14

Articles of association require one, SHs who own 10% or more ask for one, company is public, company is involved in insurance or banking.

Question 15

Many subsidiary companies are exempt from audit irrespective of their size as long as…

Answer 15

…the parent company guarantees the liabilities of the subsidiary.

Question 16

What is an ISA 500 (UK) engagement?

Answer 16

An audit of year-end financial statements

Question 17

In relation to ISA 500 (UK) audit engagements, what is AEIOU?

Answer 17

Analytical procedures, enquiry, inspection, observation, recalculation

Question 18

State 3 aspects of the ISA 500 (UK) engagement.

Answer 18

Reasonable assurance engagement, positive opinion, FS show a true and fair view in all material respects

Question 19

Define ISRE 2400.

Answer 19

An engagement to review the financial statements, using enquiry and analytical procedures. It is a limited assurance engagement that gives a negative conclusion (‘nothing has come to our attention…’).

Question 20

Define ISAE 3400.

Answer 20

An engagement to give assurance on prospective financial information (PFI), by assessing assumptions, re-computation and written reps. It is a limited assurance engagement that gives a negative conclusion (‘nothing has come to our attention…’).