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ACA - Audit & Assurance > Chapter 3 > Flashcards

Chapter 3 Flashcards

1
Q

What do the readers of financial statements want assurance of when looking at various co. financial statements? How does this happen?

A

That the reliability of the company’s financial statements’ do not vary from company to company. This happens by ensuring that each set of financial statements have been audited by common standards

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2
Q

How do we ensure that auditors follow the same common standards when carrying out an audit?

A

Ensuring that they are regulated

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3
Q

Who governs/regulates UK auditors?

A

UK auditors are regulated by the 2006 companies act and the ISAs (UK)

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4
Q

Who creates the auditing standards?

A

The IAASB, who is a subsidiary of IFAC.

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5
Q

what is the purpose of international standards?

A

International standards are designed to provide services of a consistently high quality, but do not override local rules. Countries are encouraged to develop local systems to comply with these international standards.

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6
Q

How are the auditing standards drafted?

A
  1. Sub-committees of IAASB will work on a particular area and develop an exposure draft which is published.
  2. The exposure draft is revised as a result of comments made by interested parties and sometimes re-exposed
  3. When the amendments have been finalised, an international standard is published.
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7
Q

What is the forum of firms?

A

Set up by the largest accountancy practices to co-operate on standard setting and other matters. These are transnational audits, and promotes consistency and high quality standards.

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8
Q

What standards does the IAASB set?

A
  1. ISAs - International standards of auditing
  2. ISAEs - International standards of audit engagements
  3. ISREs - International standards of review engagements
  4. ISRSs - International standards of related services
  5. ISQCs - International standards on quality control
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9
Q

who issues the ISAs on a global level? what is the positive of this

A

The IAASB, this helps create a uniform application of rules on a global level.

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10
Q

What should an auditor do if they do not apply the ISAs?

A

They should document their justification for their departure

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11
Q

where do ISAs rank in the context of local law and regulations?

A

They do not override this. But the local laws and regulations should comply with this.

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12
Q

What are the 5 steps the IAASB take in order to develop the ISAs?

A
  1. They delegate to the subcommittee the responsibility for the preparation and drafting of accounting standards and statements.
  2. Exposure draft prepared by IAASB as a result of step 1.
  3. If approved, this exposure draft is widely distributed for comment by memeber bodies of IFAC.
  4. Comments and suggestions as a result of the exposure in step 3 are then considered and further the exposure draft is revised.
  5. Once the exposure draft is approved, it is issued as an ISA.
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13
Q

Who issues the IAASB ISA at a local level in the UK

A

FRC.

They will modify and issue the ISAs accordingly for local level application.

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14
Q

The FRC issues auditing standards. It…

A
  • amends international standards on auditing for any specific uk factors and then reissues these as ISAs
  • can issue the auditing standards in its own right without having to gain the approval of all the professional accounting bodies.
  • has strong representation from outside the accounting profession
  • has a commitment to openness, with agenda papers being circulated to interested parties and an annual report being published
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15
Q

What does FRC guidance state about risk management for businesses?

A

They state that risk management should be part of the day to day management and governance of a business rather than a separate exercise.

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16
Q

What is the Sarbanes- Oxley act and what are its implication?

A

This act was brought in in the US and ensures that company CEO’s, for example, sign off on the FS, to give more certification that the FS produced are strong and free from preventing error.

17
Q

What is the process for implementing internal controls?

A
  1. Identify business risk
  2. Assess the risk that will threaten those objectives
  3. Design internal controls to manage those risks
  4. operate the internal controls in accordance with their design.
18
Q

At what stages of the process for implementing internal control may assurance be given?

A

risk identification stage, design of the system stage and the operation of the system stage

19
Q

What is important when carrying out an engagment relating to internal controls?

A

That the practitioner has sufficient knowedge of the business so that they can identify and understand the events , transactions and practices which will impact on the system of the internal controls which have been implemented.

20
Q

What will an auditor consider when providing assurance on the design and operation of the system? (step 3)

A
  • The design of the system in addressing a set of identified risks
  • The operation of the system
21
Q

When looking at the design and operation of the internal control system, what will the level of assurance given depend on?

A

This will depend on:

  • nature of the entity
  • knowledge of the business the practitioner has
  • scope of the engagement
22
Q

Why are auditors unlikely to be able to provide a high level of assurance when looking at the applicable risks and the design and operation of the system?

A

The id of risks requires a high level of judgement as there is no universally recog’d criteria for evaluating the effectiveness of an entitys risk evaluation.

23
Q

What should an assurance report always include when looking at internal controls and why?

A

They should always have a mention of inherent limitations. e.g. chance of staff colluding to conduct fraud. They should always include a section on these limitations in order to prevent an unnecessary expectations gap.

24
Q

What is harmonisation and what is its relevance?

A

Harmonisation is the process of aligning international standards for auditing so that companies are audited in a comparable way globally.

This is of importance particularly in the UK standard setters with European wide req in relation to audit.

25
Q

What do the auditing standards define professional scepticism as?

A

“an attribute that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error and fraud, and a critical assessment of audit evidence.”

26
Q

What is the role of the audit committee with regard to professional scepticism?

A

They must ensure that there is communication to the shareholders with regard to the extent of scepticism employed in carrying out the audit work

27
Q

An opinion can not be expressed on the truth and fairness of the FS until…? (4)

A
  1. there has been sufficient inquiry and challenge
  2. management’s assertions have been thoroughly tested
  3. audit evidence has been critically appraised and deemed to be sufficiently persuasive
  4. alternative treatments for items in the FS have been considered.
28
Q

benefit to big data on audit?

A

Allows the auditor to monitor large and complex sets of data rather than just samples, on a more frequent and continuous basis

29
Q

What is the kingman review?

A

Arose following the carillion collapse, and suggests that FRC is abolished and is replaced witht the audit reporting and governance authority (ARGA)

30
Q

What is the benefits of the ARGA?

A
  1. directly regulate the biggest audit firms
  2. impose greater sanctions in case of corporate failure
  3. require rapid explanations from companies
  4. publish reports about a companys conduct and management
31
Q

What changes did the Competitions and markets authority suggest for the future of audit?

A
  1. Robust regulatory oversight of the committees that run the selection process for audited companies, and oversee the audit, to make them more accountable and ensure that they prioritize quality.
  2. mandatory joint audits - icrease capacity and choice in the audit market
  3. split up big four audit and non-audit services
  4. five-year review of progress by regulator
32
Q

What are the benefits of a joint audit?

A

In a joint audit, more than one auditor is responsible fore the audit opinion, and this the audit firms will be jointly liable in the event of litigation.

Increased competition and quality of audit

33
Q

Main criticisms of joint audits?

A

Expensive as now there are two firms performing the audit.

34
Q

What are the advantages and disadvantages of accounting and audit standards to auditors and the consequences of these standards being enforceable by statute

A

See textbook page 70 for long answer

ACA - Audit & Assurance (5 decks)

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