Chapter 4 - Process of assurance: evidence and reporting

Question 1

Define audit evidence.

Answer 1

Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based.

Question 2

Define tests of controls.

Answer 2

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

Question 3

Define substantive procedures.

Answer 3

Audit procedures designed to detect material misstatements at the assertion level. Substantive procedures comprise:

1. Tests of detail (of classes of transactions, account balances and disclosures)
2. Substantive analytical procedures

Question 4

Why do auditors carry out tests of controls?

Answer 4

When the auditors carry out tests of controls, they are seeking to rely on the good operation of the control system that the company has in place to draw a conclusion that the financial statements give a true and fair view.

Question 5

Why do auditors carry out substantive procedures?

Answer 5

When the auditors carry out substantive procedures, they are testing whether specific items within balances or transactions in the financial statements are stated correctly.

Question 6

Do ISAs require auditors to carry out substantive procedures?

Answer 6

Yes.

ISAs require that auditors must always carry out some substantive procedures, because the limitations in internal control systems.

However, there may also be instances of cases where
it is more appropriate to test controls than to test specific balances or transactions

Question 7

Define sufficiency of audit evidence.

Answer 7

Sufficiency is the measure of the quantity of audit evidence.

Question 8

Define appropriateness of audit evidence.

Answer 8

Appropriateness is the measure of the quality or relevance and reliability of the audit evidence.

Question 9

What are the five aspects to consider when evaluating the reliability of audit reference?

Answer 9

External - Audit evidence from external sources is more reliable than that obtained from the entity’s records.

Auditor - Evidence obtained directly by auditors is more reliable than that obtained indirectly or by inference.

Entity - Evidence obtained from the entity’s records is more reliable when related control systems operate effectively.

Written - Evidence in the form of documents (paper or electronic) or written representations are more reliable than oral representations.

Originals - Original documents are more reliable than photocopies, or facsimiles.

Question 10

What are financial statement assertions?

Answer 10

Representations by management, explicit or otherwise, that are embodied in the financial statements, as used by the auditor to consider the different types of
potential misstatements that may occur.

Question 11

What are the six assertions regarding assertions about

classes of transactions and events, and related disclosures, for the period under audit?

Answer 11

Occurrence - Transactions and events recorded have actually occurred.

Completeness - All transactions, events and disclosures included.

Accuracy

Cut-off - Transactions and events recorded in correct accounting period.

Classification - Transactions and events recorded in proper accounts

Presentation - Clearly described, relevant and understandable.

Question 12

What are six assertions about account balances, and

related disclosures, at the period end?

Answer 12

Existence - assets, liabilities and equity interests exist

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

Completeness - All assets, liabilities, equity interests and equity disclosures included.

Accuracy, valuation and allocation - assets, liabilities, and equity interests have been included in the financial statements at appropriate amounts.

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

Presentation - Clearly described, relevant and understandable.

Question 13

When is it appropriate to perform tests of controls?

Answer 13

When the auditor believes controls are operating effectively.

When it will not be possible to obtain sufficient appropriate audit evidence simply from substantive procedures.

Question 14

Which procedures can be used when performing tests of controls?

Answer 14

Inquiry

Reperformance

Observation

Question 15

At least how often should controls be tested for effectiveness?

Answer 15

In any case, controls should be tested for effectiveness at least once in every three audits.

Question 16

What are three substantive procedures that the auditor MUST carry out?

Answer 16

Agreeing the financial statements to the underlying accounting records

Examining material journal entries

Examining other adjustments made in preparing the financial statements

Question 17

In what two categories do substantive procedures fall?

Answer 17

Analytical procedures - tend to be appropriate for large volumes of predictable transactions.

Other procedures (tests of detail) -  May be appropriate to gain information about account balances (for example, inventories or trade receivables), particularly
in verifying the assertions of existence and valuation.

Question 18

What is a BIG advantage of data analytics?

Answer 18

May be possible to examine a complete data set - 100% of the transactions and to represent them graphically.

Question 19

What are six explicit opinions found in an ‘unmodified’ auditor’s report?

Answer 19

In respect of the state of the company’s affairs at the end of the financial year.

In respect of the company’s profit or loss for the financial year.

In relation to the financial reporting framework (IFRSs or UK GAAP).

In respect of other legal requirements of the Companies Act 2006.

The information given in the strategic report and the directors’ report is consistent with the financial statements.

Question 20

What are six items included only by exception in an auditors’ report?

Answer 20

Adequate accounting records have been kept.

Returns adequate for the audit have been received from branches not visited.

The financial statements are in agreement with the accounting records and returns.

All information and explanations have been received as the auditors think necessary and they have had access at all times to the company’s books, accounts and vouchers.

Details of directors’ emoluments and other benefits have been correctly disclosed in the financial statements.

Particulars of loans and other transactions in favour of directors and others have been correctly disclosed in the financial statements.

Question 21

What are fourteen basic elements that an auditor’s report should contain?

Answer 21

Title

Addressee

Auditor’s opinion

Basis for opinion

Going concern section, where applicable

Key audit matters section, for audits of listed companies

Other information

Responsibilities of management for the financial statements

Auditor’s responsibilities for the audit of the financial statements

Opinion on other matters

Matters on which the auditor is required to report by exception

Name of engagement partner

Signature of engagement partner

Auditor’s address

Date of the report

Question 22

What is the ‘expectations gap’?

Answer 22

The ‘expectations gap’ is defined as the difference between the apparent public perceptions of the responsibilities of auditors on the one hand and the legal and professional reality on the other.

Question 23

What are three specific issues relating to the ‘expectations gap’?

Answer 23

Misunderstanding of the nature of audited financial statements:

• the statement of financial position provides a fair valuation of the reporting entity
• the amounts in the financial statements are stated precisely
• the audited financial statements will guarantee that the entity concerned will continue to exist

Misunderstanding as to the type and extent of work undertaken by auditors:

• all items in financial statements are tested
• auditors will uncover all errors
• auditors should detect all fraud

Misunderstanding about the level of assurance provided by auditors:

• the auditors provide absolute assurance that the figures in the financial statements are correct

Question 24

The international standard on assurance engagements requires that an assurance report must have which components?

Answer 24

A title that clearly indicates the report is an independent assurance report

Addressee

An identification and description of the subject matter information and, when appropriate, the subject matter

Identification of the criteria

Significant inherent limitations

A statement restricting the use of the assurance report to those intended users or that purpose

A statement to identify the responsible party and to describe the responsibilities of the responsible party and the practitioner

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

The assurance report date

The name of the firm or practitioner, and a specific location