General Flashcards
What are the Director responsibilities?
Keep adequate accounting records
Provide audited financial statements
Adequate accounting records must be kept to which are sufficient to:
1) Show and explain the company’s transactions
2) Disclose with reasonable accuracy at any time the financial position and financial performance of the company
3) enable the directors to ensure that any accounts required to be prepared comply with the requirements of the Act
Records should contain what?
Money received and spent by the company and what it relates to (e.g. cash book/bank statements/invoices/payroll)
A record of the assets and liabilities of the company (e.g. non-current asset register/sales day book/purchase day book)
Statement of inventory (stock) held by the company (e.g. record of inventory count/sales & purchase invoices to determine inventory value)
Where should records be kept?
Registered office or another location approved by Directors
What is the length of time that records should be kept for a private limited company?
3 years
What is the length of time that records need to be kept for a public company?
6 years
Failure to comply to keep adequate records means what?
It’s a criminal offence and directors can be subject to fines and/or imprisonment.
What does reasonable assurance mean?
They are not materially misstated.
What is limited assurance?
Lower than reasonable and can be provided to third parties like banks.
Does reasonable assurance give a positive or negative expression?
Positive
Does limited assurance give a positive or negative expression?
Negative expression
Who is exempt from an audit?
Small companies
Dormant companies
What makes you a small company?
Be private limited company not public Not be part of a group And meet two of the three below: 1) turnover less that £10.2 million 2) Balance sheet less than £5.1 million 3) No more than 50 employees
What makes a company dormant?
It has been dormant since incorporation or since the last financial year
And it is a small company
And it is not required to produce group accounts
What two types of company are not exempt from audit even when dormant?
Bank or insurance
Who can audit?
Be a member of a recognised supervisory board
Hold an appropriate qualification
What does independent in mind mean?
Member being objective and ensuring work they conduct is free from bias or prejudice
What is independent in appearance?
Avoiding situations where a reasonable and informed observer could questions your ability to be objective or apply professional scepticism.
If there is a conflict of interest what must you do.
Notify the clients involved
If both clients are happy for you to act for them when there is a conflict of interest what safeguards do you need?
1) separate engagement teams should be used for each client
2) procedures to prevent access of information to both teams e.g. passwords
3) clear guideline to be issued to team members about confidentiality
4) signed confidentiality agreements from team members
If you are employed by who could a gift be illegal under the anti-corruption legislation
A public body
What does the International Audit and Assurance Standards Board (IAASB) do?
Sets international standards for auditing called International Standards on Auditing (ISA’s).
What does the Auditing Practices Board (APB) do?
Adopts ISA’s which they feel are applicable for the UK & Ireland and amend them to give guidance to UK auditors.
APB is a constituent body of the …
Financial Reporting Council (FRC)
Who has overall responsibility to oversee and monitor the audit profession in the UK?
Financial Reporting Council (FRC)
What are the duties of the auditors?
1) Give an opinion on true and fair view of the accounts
2) Establish and report that adequate accounting records have been kept
3) Ensure that they receive sufficient information for the purpose of the audit
What are the rights of the auditors?
1) A right of access at all times to the company’s books, accounts and vouchers
2) A right to require such information and explanations from company officers as the auditors think necessary for the audit
3) To be given notice of meetings of the company’s shareholders
4) To attend and speak at those meetings on matters relating to the audit
For negligence to be proved what three things must be established?
1) The fact that a duty of care existed
2) The duty of care was breached
3) The breach caused a loss to the claimant
Who do auditors have an automatic duty of care to?
The client it does not have to be proven it is automatic
If someone who is not the client sues to auditors they must prove there was a duty of care to them, how would they do this?
Prove the auditors knew they would use the financial statements or audit report
How does being sued for negligence affect the audit firm?
1) Pay substantial damages
2) Bad publicity for the firm
3) Firm’s recognised supervisory body may take disciplinary action against them
4) Firm may not remain a going concern
What can an audit firm do to limit payments for negligence?
1) Limited liability agreement
2) Statement in the audit report specifically limiting liabilities to third parties
3) Setting up the audit firm as a limited liability partnership LLP
4) Professional Indemnity Insurance (Pll)
What is the three step process to give reasonable assurance?
1) Identify risks of material misstatement (Planning)
2) Test the areas and gain sufficient audit evidence
3) Form an opinion from reviewing the evidence
What are the 5 elements that any internal control system has according to ISA 315?
1) The control environment
2) The entity’s risk assessment process
3) The information system
4) Control activities
5) Monitoring of controls
What are three inherent limitations of a system of controls?
1) Human error
2) Collusion (work together)
3) Management override
What are the advantages of using a flowchart to take system notes?
Quick to prepare
Information is in a standard form
All document flows recorded
Concise - no need for lots of narrative
What are the disadvantages of flowcharts to take system notes?
Only suitable for standard systems
Useful for flows of information and documents but no use once information flow stops
Major amendments require redrawing
What are the advantage of questionnaires?
They are easy and quick once they have been made.
What are the disadvantages of questionnaires?
Controls may be ignore, easy for client to just tick and overstate controls, need to tailor them to each client or client type
What is the substantive approach and why would you do it?
Controls are ignored as they are not effective and balances will be tested in detail
What is the combined approach and why would you do it?
Controls are effective and controls are tested and then less substantive completed than substantive approach
What are the 4 ways an auditor can test?
Enquiry - ask employees
Inspection - inspect documents
Observation - watch staff operating the system
Computer Assisted Audit Techniques (CAAT) - using a computer to interrogate data on the clients system
What is audit software used for?
Substantive testing
Auditor uses their own programmes to carry out audit work and gather evidence
What is test data used for?
Test of control
Uses client system
What is the benefit of CAAT’s?
Time saving
What are the drawbacks of CAATS’s?
Costly as need to be tailor made to each client
Requires training
Needs to be used live on the system so causes inconvenience for the client and can cause viruses
Who are those charged with governance?
Directors and shareholders
Define deficiencies
Any control which is designed, implemented, or operated in such a way that makes it unable to prevent or detect misstatements in the financial statements. or where control is completely missed.
Define significant
When potential effect is so great or there are so many of them.
Define control risk
Risk that entity’s controls do not prevent/detect fraud or misstatement
Define inherent risk
Risk that arises due to nature of the business and the industry they operate in
Define detection risk
The risk that errors will exist in the financial statements and the auditors will not discover them
What is a sampling risk?
Risk that the sample selected does not fairly represent the population as a whole. Therefore wrong conclusion drawn usually due to too small a sample.
What is a non-sampling risk?
A risk not caused by sampling
What should an auditor do if they think that fraud exists?
1) Carry out further/different audit tests
2) Document their findings in the working papers
3) Consider the impact on the rest of the audit
4) Report it to management and or the relevant authority
What does the audit strategy establish?
The scope, timing and direction.
What is discussed at the planning meeting?
Discuss the audit strategy and prepare a more detailed audit plan
What gives quality audit evidence?
Evidence gathered by the audit team
Originals rather than copies
Third party documentation is better than internal information from the company
Written documentation is better than oral evidence
What is an adjusting event?
Those that provide additional evidence of conditions that exist at the year end
What is a non-adjusting event?
Those events that did not exist at the year end
When is there an active duty to disclose events?
Up to auditor’s report issued
When is there a passive duty to disclose events?
After the auditor’s report is issued
Why would you qualify an audit report due to disagreement?
When there is material misstatement and management will not adjust for it.
What is included in a modified audit report?
Emphasis of matter paragraph to highlight a significant matter
Why would you qualify an audit opinion?
Insufficient evidence
Disagree with numbers
What is pervasive?
When there are lots of errors and so the opinion would be not true and fair
