Chapter 4 - Process of assurance: Evidence and reporting

Question 1

When describing a analytic procedure what 3 parts is it broken into?

Answer 1

VERB + WHO/WHAT + WHY

VERB = AIRCORE

Question 2

What is the primary objective of obtaining evidence in an assurance engagement?

Answer 2

To enable practitioners to express an opinion (if FS is T +F) on whether the subject of the assurance engagement is in line with the identified criteria.

Question 3

Define ‘Audit Evidence’

Answer 3

Audit evidence is the information the auditor uses to arrive at conclusions and support their opinion on the financial statements.

Question 4

What are the two main types of audit tests?

Answer 4

1) Tests of Controls: Testing the procedure.
Evaluate the effectiveness of controls - can they prevent, detect or correct material misstatements at the assertion level

2) Substantive Procedures: Testing the number.
Detect material misstatements directly through testing details or performing analytical procedures. Broken down into test of details and substantive analytical procedure

Question 5

What is a test of controls? (3)

Answer 5

Type of audit test

Test the procedure

Audit procedures designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting material misstatements at the assertion level.

Question 6

What is substantive procedures?

Answer 6

Type of audit test

Test the number itself

Audit procedures designed to detect material misstatements at the assertion level. Substantive procedures comprise:
 Tests of details (of classes of transactions, account balances and disclosures). e.g. agree a number does the invite and other documents match if we recalculate this.
 Substantive analytical procedures.

Question 7

What is a tests of details?

Answer 7

Type of substantive procedure which is an audit test

Tests of details (of classes of transactions, account balances and disclosures). e.g. agree a number does the invite and other documents match if we recalculate this.

Question 8

When is control testing preferred in an audit?

Answer 8

Control testing is preferred when internal controls are strong, allowing auditors to place reliance on them and reduce the extent of substantive testing required.

Auditors will rely on these controls

IC Strong = Less substantive testing

Question 9

What should an auditor do if internal controls are weak?

Answer 9

If controls are weak, the auditor must increase substantive testing to compensate for the higher risk of fraud or error.

Auditors will not rely on these controls, have less faith

IC Weak = More substantive testing

These weakness are reported in the management letter along with suggestions

Question 10

Where do auditors report any internal control weaknesses?

Answer 10

These weakness are reported in the management letter along with suggestions

Question 11

Are substantive tests required on all audits?

Answer 11

Substantive tests are performed on all audits. It is just the level of substantive testing that changes. It is never appropriate to just do tests of control and no substantive testing.

Question 12

According to ISA 500 (UK & Ireland), what must auditors obtain in terms of evidence?

Answer 12

Auditors must obtain sufficient and appropriate audit evidence to form reasonable conclusions that support their opinion.

Question 13

What factors determine the sufficiency of audit evidence?

Answer 13

Sufficiency is influenced by risk assessment, control adequacy, materiality, and the auditor’s previous experience with the client.

Question 14

If there is a low materiality, what does this mean in regards to our testing?

Answer 14

Low materiality = High risk = More testing

Question 15

If there are weak controls, what does this mean in regards to our testing?

Answer 15

Weak controls = More testing

Question 16

If there was an issue with our previous year audit testing, what does this mean in regards to our testing this year?

Answer 16

Issues with previous year testing = More testing

Question 17

What are key attributes of ‘appropriate’ audit evidence?

Answer 17

Appropriate evidence must be both RELEVANT to the assertion being tested and RELIABLE, with a preference for external over internal sources, written over oral, and original documents over copies.

Question 18

Define RELEVANT in regards to appropriate audit evidence (2)

Answer 18

• Does it relate to the assertion being tested?
• Is it measuring what it should be?

Question 19

Define RELIABLE in regards to appropriate audit evidence (4)

Answer 19

• Can we trust it
• Written over oral
• Original documents over copies
• Order of preferred evidence, as no bias and nothings been tampered:
  1. External over internal sources - 3rd party
  2. Auditor generated
  3. Client generated

Question 20

What are some methods to get evidence for gathering procedures?

Answer 20

AIRCORE

 Analytical Procedures – evaluation of financial information by studying possible relationships among financial and non-financial data
 Inspection – of a document such as an invoice
 RecalcUlation – check the mathematical accuracy of a document - numbers
 Confirmation – relates to evidence from a third party source
 Observation – of a process such as an inventory count - better for checking IC
 Reperformance – verification managements approach by the auditor - action
 Enquiry – ask a relevant person for information

Question 21

What is AIRCORE?

Answer 21

Methods to get evidence for gathering procedures

 Analytical Procedures – evaluation of financial information by studying possible relationships among financial and non-financial data
 Inspection – of a document such as an invoice
 RecalcUlation – check the mathematical accuracy of a document - numbers
 Confirmation – relates to evidence from a third party source
 Observation – of a process such as an inventory count - better for checking IC
 Reperformance – verification managements approach by the auditor - action
 Enquiry – ask a relevant person for information

Question 22

What does the A stand for in AIRCORE

What are some weaknesses of this procedure?

Answer 22

Methods to get evidence for gathering procedures

 Analytical Procedures – evaluation of financial information by studying possible relationships among financial and non-financial data

• Still an estimate
• Bias (design a procedure that helps me get a certain figure)
• Good understanding of client needs e.g. how of we know what the annual % pay rise is
• Time consuming
• If 1st year being audited there’s no comparisons
• Multiple reasons behind differences

Question 23

What does the I stand for in AIRCORE

What are some weaknesses of this procedure?

Answer 23

Methods to get evidence for gathering procedures

 Inspection – of a document such as an invoice

• Fake invoice
• Tampered with
• Lost
• Could be borrowed e.g. an asset - van
• Lack of the physical detail you need

Question 24

What does the R’s stand for in AIRCORE

What are some weaknesses of this procedure?

Answer 24

Methods to get evidence for gathering procedures

 RecalcUlation – check the mathematical accuracy of a document - numbers
 Reperformance – verification managements approach by the auditor - action

• Human error
• Accuracy vs correctness e.g. interest being told 5% so all adds up but document says it should be 5% therefore its not correct

Question 25

What does the C stand for in AIRCORE

Answer 25

Methods to get evidence for gathering procedures

 Confirmation – relates to evidence from a third party source

Question 26

What does the O stand for in AIRCORE

What are some weaknesses of this procedure?

Answer 26

Methods to get evidence for gathering procedures

 Observation – of a process such as an inventory count - better for checking IC

• Move stock about
• Human error
• Different behaviour when watched/observed

Question 27

What does the E stand for in AIRCORE

What are some weaknesses of this procedure?

Answer 27

Methods to get evidence for gathering procedures

 Enquiry – ask a relevant person for information

• Lie to you
• Collusion if you ask multiple people
• Tell you what you want to hear
• Lack of people to ask
• Lack of expertise client side
• Delays in response
• Not a strong support
• Might not challenge client response

Question 28

What is an assertions from an auditors POV?

Answer 28

Used to determine what I am testing the balance for

Different for SOFP (CCPERV) and SOPL (CCCOAP)

Question 29

What are ‘Assertions’ in the context of financial statements?

Answer 29

Assertions are representations by management that are included in financial statements and serve as the basis for the auditor’s evidence collection.

Question 30

If I am reviewing the assertions about classes of transactions and events, and related disclosures, for the period under audit, which financial statement does it related to? What are my assertions?

Answer 30

SOPL

CCCOAP

Completeness
Classification
Cut off
Occurence
Accuracy
Presentation

Question 31

Assertion - Classification

Define
Which statement does it occur in?
What are we testing for?

Answer 31

Classification: transactions and events have been recorded in the proper accounts.

This is more granular testing e.g. has it gone to the correct expense account

SOPL

Question 32

Assertion - Cut-off

Define
Which statement does it occur in?
What are we testing for?

Answer 32

Cut-off: transactions and events have been recorded in the correct accounting period.

Especially after year end - we would then test a certain amount of days +/- year end

SOPL

Question 33

Assertion - Completeness

Define
Which statement does it occur in?
What are we testing for?

Answer 33

Completeness: all transactions, events and disclosures that should have been recorded have been recorded.

Is anything missing, has it been OMITTED

Testing for U/S

SOPL

Question 34

Assertion - Occurence

Define
Which statement does it occur in?
What are we testing for?

Answer 34

Occurrence: transactions and events that have been recorded or disclosed have occurred and pertain to the entity.

Has this actually taken place, is this transaction genuine

Testing for O/S

SOPL

Question 35

Assertion - Accuracy

Define
Which statement does it occur in?
What are we testing for?

Answer 35

Accuracy: amounts and other data relating to recorded transactions and events have been recorded appropriately and disclosures accurately described.

Is the number correct

Question 36

Assertion - Presentation

Define
Which statement does it occur in?
What are we testing for?

Answer 36

Presentation: transactions are appropriately aggregated or disaggregated. Disclosures are understandable and in line with IFRS requirements.

Is the grouping correct, are they in the correct headings?

Question 37

Assertions about account balances, and related disclosures, at the period end, which financial statement does it related to? What are my assertions?

Answer 37

SOFP

CCPERV

Completeness
Classification
Presentation
Existence
Rights and obligations
Valuation

Question 38

Assertion - Completeness

Define
Which statement does it occur in?
What are we testing for?

Answer 38

Completeness: all assets, liabilities and equity interests that should have been recorded have been recorded, and disclosures that should have been included have been included.

Testing for U/S

SOFP

Question 39

Assertion - Classification

Define
Which statement does it occur in?
What are we testing for?

Answer 39

Classification: assets, liabilities, and equity interests have been recorded in the proper accounts.

e.g. current or non current liability

SOFP

Question 40

Assertion - Presentation

Define
Which statement does it occur in? SOFP
What are we testing for?

Answer 40

Presentation: assets, liabilities, and equity interests are appropriately aggregated or disaggregated. Disclosures are understandable and in line with IFRS requirements.

SOFP

Question 41

Assertion - Existence

Define
Which statement does it occur in?
What are we testing for?

Answer 41

Existence: assets, liabilities and equity interests exist.

Has this actually taken place, is this transaction genuine

Testing for O/S

SOFP

Question 42

Assertion - Rights and obligations

Define
Which statement does it occur in?
What are we testing for?

Answer 42

Rights and obligations: the entity holds or controls the rights to assets and liabilities are the obligations of the entity.

SOFP

Question 43

Assertion - Valuation

Define
Which statement does it occur in?
What are we testing for?

Answer 43

Valuation, accuracy and allocation: assets, liabilities, and equity interests and any related disclosures are included in the financial statements at appropriate amounts.

SOFP

e.g. is inventory valued at the lower of cost and NRV

Question 44

What 3 assertions are the same in SOFP and SOPL?

Answer 44

Completeness
Classification
Presentation

Question 45

What is an ‘Unqualified’ audit report?

Answer 45

An unqualified/unmodified report is issued when the auditor concludes that the financial statements give a true and fair view, without any material misstatements.

Question 46

In an audit report, what does the Companies Act 2006 require the auditors to state? (3)

Answer 46

The Companies Act 2006 requires the auditors to state explicitly whether in their opinion the annual accounts give a true and fair view, meaning:

 Financial statements have been properly prepared in accordance with the Companies Act
 Financial statements have been properly prepared in accordance with the relevant financial
reporting framework
 The information in the directors’ report is consistent with the financial statements

1. Companies act
2. Financial reporting framework
   3, Directors report consistent with FS

Question 47

In an audit report, what do auditors need to report by exception? (5)

Answer 47

RAPID

rETURNS HAVE BEEN RECEIVED FROM BRANCHES NOT VISITED
aCCOUNTS AGREE WITH RECORDS - FS AGREES
pROPER ACCOUNTING RECORDS KEPT
iNFORMATION AND EXPLANATIONS ENOUGH FOR AUDITORS
dIRECTORS PAY CORRECTLY DISCLOSED

 Returns adequate for the audit have been received from branches not visited.
 The financial statements are in agreement with the accounting records and returns.
 Adequate accounting records have been kept.
 Auditors have had access at all times to the company’s books, accounts and vouchers.
 All information and explanations have been received as the auditors think necessary
 Details of directors’ C (pay/remuneration) and other benefits have been correctly disclosed in the financial statements.

Question 48

RAPID

Answer 48

rETURNS HAVE BEEN RECEIVED FROM BRANCHES NOT VISITED
aCCOUNTS AGREE WITH RECORDS - FS AGREES
pROPER ACCOUNTING RECORDS KEPT
iNFORMATION AND EXPLANATIONS ENOUGH FOR AUDITORS
dIRECTORS PAY CORRECTLY DISCLOSED

Question 49

What basic elements are usually in the audit report?

Answer 49

The audit report should include the following basic elements, usually in the following layout but tailored to the circumstances of each engagement.

 Title
 Addressee
 Auditor’s opinion section comes first, expressing an opinion on the financial statements
 Basis for opinion section gives reason and detail surrounding the above opinion
 Conclusions relating to going concern section, includes work we did to ascertain the company’s ability to continue as a going concern and where applicable includes discussion of any significant uncertainties facing the company.

 Our Approach to the audit section, (listed companies) the auditor highlights significant matters such as:
Key Audit Matters
– Areas of high risk of material misstatement in the financial statements
– Areas requiring significant auditor judgement such as auditing estimates
– The effects of significant events or transactions that occurred in the year

How our scope addressed this matter
–Explanation of how the scope addressed each key audit matter

 Our application of materiality section, discussed how materiality was established, what the threshold is and how it was applied.
 Other information section, discusses auditors’ responsibilities for other information in the financial reports, we consider its consistency and where inconsistent report such.
 Opinion on other matters prescribed by the Companies Act 2006, for example:
– The Companies Act requires confirmation of whether the Directors Report and strategic
report are consistent with the financial statements.

 Matters on which the auditor is required to report on by exception: For example, identify if:
– If adequate accounting records have not been kept
– If all information and explanations required for the audit have not been received
– If financial statements are not in agreement with the underlying accounting records
– If details of directors’ emoluments have not been properly disclosed in the financial statements

 Responsibilities of directors for the financial statements, ie to prepare the financial statements following applicable standards, in line with the Companies Act and apply correct going concern basis.
 Auditor’s responsibilities for the audit, ie
– Explain our objective to do a reasonable assurance engagement in accordance with ISAs.
– The auditor may provide a link to the FRC website which describes their responsibilities.
 Name of engagement partner
 Signature of engagement partner
 Auditors address
 Date of the report

Question 50

What does ‘going concern’ mean?

Answer 50

Likelihood of continuing in operation for the next 12 months

“Going concern” is an accounting and auditing concept that assumes a company will continue its operations for the foreseeable future, without any intention or need to liquidate or significantly curtail its business activities.

This assumption impacts how financial statements are prepared because it implies that assets will be used and liabilities will be settled in the normal course of business, rather than under a forced sale or liquidation scenario.

Question 51

What do ‘other assurance reports’ contain?

Answer 51

The main assurance report is addressed to users of the assurance material. The international standard on assurance engagements requires that an assurance report must have the following components:

 Title
 Addressee
 An identification and description of the subject matter
 Identification of the criteria
 A statement restricting the use of the assurance report to those intended users or that purpose
 A statement to identify the responsible party
 A statement that the engagement was performed in accordance with International Standards on Assurance Engagements (ISAEs)
 A summary of the work performed
 The practitioner’s conclusion (positive or negative, depending on the level of assurance being given and the work carried out)
 The assurance report date
 Signed the name of the firm or practitioner

Question 52

Which three of the following are reported by exception in the audit report?
A All information and explanations required for the audit have been received
B Adequate accounting records have been kept
C The directors’ report is consistent with the financial statements
D The financial statements have been prepared in accordance with the Companies Act 2006
E Details of directors’ emoluments have been properly disclosed in the financial statements

Answer 52

A All information and explanations required for the audit have been received
B Adequate accounting records have been kept
E Details of directors’ emoluments have been properly disclosed in the financial statements

Question 53

4 Which three of the following statements are valid?
A Positive (reasonable) assurance will be given on a statutory audit assignment.
B Positive (reasonable) assurance requires more rigorous work to be undertaken than negative assurance does.
C Positive (reasonable) assurance will be given on a review assignment.
D Negative assurance is assurance given in the absence of any indications to the contrary.

Answer 53

A Positive (reasonable) assurance will be given on a statutory audit assignment.
B Positive (reasonable) assurance requires more rigorous work to be undertaken than negative assurance does.
D Negative assurance is assurance given in the absence of any indications to the contrary.
Positive (or reasonable) assurance will be given on an audit assignment, whereas negative (or limited) assurance is given on a review assignment, reflecting the limited procedures carried out.

Question 54

The level of assurance given by an assurance engagement will depend on the type of engagement. For each of the following examples, select the level of assurance you would expect to be given. Statutory audit
A Absolute
B Reasonable
C Limited
Report on prospective financial information
D Absolute
E Reasonable
F Limited
Report on review of interim financial information
G Absolute
H Reasonable
I Limited

Answer 54

Correct answer(s): B Reasonable
The statutory audit that provides reasonable assurance. No engagement can provide absolute assurance.
Correct answer(s): F Limited
A report on prospective financial information is forward looking and so can only provide limited assurance. No engagement can provide absolute assurance.
Correct answer(s): I Limited
A report on the review of interim financial information is usually limited to procedures such as analytical procedures (and enquiry of management), and so provides limited assurance. No engagement can provide absolute assurance.

Question 55

7 For each of the following situations, select the most appropriate approach which should be used by the assurance firm in the given circumstances.
The audit of a client where controls have been assessed as deficient
A Tests of controls only
B Substantive procedures only
C A mix of tests of controls and substantive procedures
The audit of a client where controls have been assessed as strong
D Tests of controls only
E Substantive procedures only
F A mix of tests of controls and substantive procedures

Answer 55

Correct answer(s):
B Substantive procedures only
A substantive approach is required, as where the controls have been assessed as deficient, this means that reliance cannot be put on these controls.
Correct answer(s):
F A mix of tests of controls and substantive procedures
Where controls have been assessed as strong, this means that they can be relied upon. In this way,
tests of controls are carried out coupled with reduced substantive procedures.

Question 56

Which three of the following are assertions used by the auditor about account balances at the period end?
A Existence
B Accuracy, valuation and allocation
C Cut-off
D Completeness

Answer 56

A Existence
B Accuracy, valuation and allocation
D Completeness
Cut-off is incorrect, because it relates to classes of transactions (ISA (UK) 315: para. A190).

Existence: The assets, liabilities, and equity balances actually exist.
Accuracy, valuation and allocation: The balances are recorded at appropriate amounts and adjustments (if any) are accurately reflected.
Completeness: All assets, liabilities, and equity balances that should be included are recorded.

Why not C. Cut-off?
Cut-off is related to transactions and is part of assertions about classes of transactions and events during the period, not account balances at the period end. It ensures that transactions are recorded in the correct accounting period.

Question 57

11 Two types of procedures used in gathering evidence are tests of controls and substantive procedures.
For each of the following examples, select the type of procedure illustrated. Observation of opening the post
A Test of control
B Substantive procedure
Calculation of the gross profit margin and comparison with that of the previous accounting period
C Test of control
D Substantive procedure
Reviewing invoices paid for evidence of authorisation
E Test of control
F Substantive procedure

Answer 57

Correct answer(s):
A Test of control
Observing the opening of the post is a test of control as it is the observation of a control taking place.

Correct answer(s):
D Substantive procedure
Calculation of the gross profit margin and comparison with that of the previous accounting period is an analytical procedure (which is, in turn, a substantive procedure).

Correct answer(s):
E Test of control
Reviewing for authorisation is also testing that a control has been applied.

Question 58

12 Two types of procedures used in gathering evidence are tests of controls and substantive procedures.
For each of the following examples, select the type of procedure illustrated. Observation of inventory counting at the year end
A Test of control
B Substantive procedure
Calculation of the quick ratio and comparison with that of the previous accounting period C Test of control
D Substantive procedure
Inquiring into the operation of the purchases transaction cycle
E Test of control
F Substantive procedure

Answer 58

Correct answer(s):
A Test of control
Observing inventory counting is a test of control as it is the observation of a control taking place (ie, the year-end inventory count).

Correct answer(s):
D Substantive procedure
Calculation of the quick ratio and comparison with that of the previous accounting period is an analytical procedure (which is, in turn, a substantive procedure).

Correct answer(s):
E Test of control
Inquiring into the systems used to process purchases is a test of control.

Question 59

15 Which two of the following would be included in an assurance report?
A Statement of directors’ responsibilities
B Identification of the criteria
C Auditor’s opinion
D Title

Answer 59

B Identification of the criteria
D Title
A statement of directors’ responsibilities and an auditor’s opinion are included within an auditor’s report, not an assurance report.

Question 60

17 For each of the following statements, select whether they are true or false.
A statutory audit provides reasonable assurance that the financial statements give a true and fair view.
A True B False
An assurance report which expresses an unmodified conclusion is designed to enhance the confidence of the intended users other than the responsible party in the information being reported upon.
C True D False

Answer 60

Correct answer(s): A True
The statutory audit is an assurance engagement that is required by statute (ie, by law), in which the auditor is required to report on whether the financial statements give a true and fair view. This is a reasonable level of assurance – not absolute, but more than limited.

Correct answer(s): C True
The ‘responsible party’ is the party which prepared the information (eg, the financial records) on which the report is made. An assurance report is made for someone other than the party which prepared the information – a third party. This cannot be the responsible party.

Question 61

18 The following are items that might be included in an auditor’s report.
For each item, select whether it is reported on explicitly, or only by exception.
Whether returns adequate for the audit have been received from branches not visited.
A Explicit
B By exception
LO 1b
Whether the information given in the strategic report and the directors’ report is consistent with the financial statements.
C Explicit
D By exception
Whether particulars of loans and other transactions in favour of directors and others have been correctly disclosed in the financial statements.
E Explicit
F By exception

Answer 61

B By exception
Whether returns adequate for the audit have been received from branches not visited is reported only by exception (an implied opinion only).

C Explicit
Whether the information given in the strategic report and the directors’ report is consistent with the financial statements is an explicit opinion.

F By exception
Whether particulars of loans and other transactions in favour of directors and others have been correctly disclosed in the financial statements is reported only by exception (an implied opinion only).