Chapter 5 Flashcards
3 reasons for quality standards
What are the 3 categories of quality standard
Protects reputation of the firm
Provides defense in event of being sued for negligence
It is in the public interest to have reliable info
ISQM 1 (firm level), ISQM 2, ISA 220 (engagement level)
Who is responsible for ISQM 1
What do they need to do
What are the 8 elements of QMS
CEO
Assign elements to appropriate individuals who are given time to allocate
Risk assessment
Governance and leadership
Ethical requirements
Continuance and acceptance
Engagement performance
Resources
Information and communication
Monitoring and remediation process
What are the purposes of review
What is the required level of documentation
Consider if work adheres to professional standards
Significant matters have been raised
Appropriate consultation have taken place
Objectives of engagement procedures have been achieved
Work performed supports conclusions made
Evidence sufficient and appropriate
If there is need to revise timing, nature and extent of work performed
Necessary to provide an experienced auditor with no previous connection to the audit and an understanding of nature, timing etc to reach the same conclusion
What is the purpose of a hot review
What does it involve (3)
When might a hot review be performed
Designed to provide objective evaluation of significant judgement and conclusions
Review of FS and proposed report
Review of judgements and scepticism
Consideration on whether appropriate consultation made on contentious matters
Listed companies (mandatory), other high risk audits or as a safeguard to objectivity
What is the purpose of a cold review
What are the results of CR (3)
On which clients might you perform a cold review
Provide the firm with reasonable assurance that its system of quality management is operating effectively
Should result in areas for improvement
Taking remedial action/ training
Preventing problems that might cause damage to the firm
Cold review is mandatory requirement of ISQM 1, there should be at least one per audit engagement partner
How can someone sue an auditor
What would they have to prove
How can audit firm limit liabilities
What extra paragraph in audit report restricts the auditors duty of care
Through negligence claim
Auditor owed them a duty of care
Duty of care was breached
As a result of a breach they suffered a loss
Professional indemnity insurance
Many act as LLPs
Firms can choose not to audit risky clients
Bannerman paragraph “the report is made solely to the company’s members as a body” “ we do not accept or assume responsibility to anyone other than the company or company’s members as a body”
Which parts about fees should be disclosed to the client (6)
Seniority of people on the job
Time expended by grade
Degree of risk and responsibility the work entails
Nature of the client business and complexity of its operation
Priority and importance of the work to the client
Expenses properly incurred eg travel
What to consider in risk analysis of a client (4)
Do the directors have integrity
Does the company have good financial record
Does the company have good internal control
Does the company have unusual transactions or complex structure
What are the 6 steps required to accept a new job/ take over a job from another auditor
Step 1&2- communicate with previous auditor. Client should give existing auditor written authority to discuss with prospective auditor
Step 3-prospective writes to existing to seek info which could influence decision to accept - if no response use recorded delivery with statement of intent to accept if no response
Step 4&5- existing auditor get written authority from client to communicate with prospective and quickly answer comms
Step 6- if no matters to report, existing auditor writes to explain this (or explains matters if they exist)
What are the legal issues relating to accepting an auditor (2)
Must be appointed by ordinary resolution at AGM, appointment must be made 28 days before account must be filed
How can clients remove an auditor
Auditors must write a statement of circumstances (or statement of no circumstances) deposited to company’s registered office
Auditor can speak at AGM and have written reps circulated on why they were removed
The auditor must retain the working papers and should cooperate with the incoming auditor
How can an auditor resign
Auditor must submit written statement of circumstances (statement of no circumstances)
Auditor can request to convene a general meeting and require the directors to circulate the statement of circumstances in advance of the meeting
What should an LOE cover (9)
Required by ISA 210
Objective and scope of the audit,
Management responsibilities,
Auditor responsibilities
Limitations of the audit
Fact that auditors are entitled to unrestricted access to records
Expectation of mgmt to provide written reps
Form and content of any communications
Maximum amount client can sue the auditor
Basis of fees
What is the definition of materiality
Info is material if it’s omission or misstatement could influence the economic decisions of users taken on the basis of FS
What materiality threshold do we use for revenue?
0.5-1%
