General Knowledge (Weeks 5 - 9)

Question 1

Components of Internal Control

Answer 1

C - Control Environment
R - Risk Assessment
I - Information Systems
M - Monitoring 
E - Existing Control Activities

Question 2

Internal Control Procedures

Answer 2

1. Adequate Separation of Duties
2. Proper Authorisation of Transactions and Activities
3. Adequate Documents and Records
4. Physical Control Over Assets and Records
5. Independent Checks on Performance

Question 3

What makes Document and Record Controls Adequate

Answer 3

• Pre-numbered
• Prepared at time of transaction
• Designed for multiple uses
• Constructed to encourage correct preparation
• Simple enough to understand

Question 4

Physical Control Over Assets and Records Procedures

Answer 4

• Physical Precautions (i.e., Locks)

- Controls for IT, Programs, Data (i.e., physical controls, access controls, data backup and recovery)

Question 5

Independent Checks of Performance

Answer 5

Should have independent secondary checks by either;

• Manual
• Programmed

Question 6

What is the Audit Program?

Answer 6

Auditor Uses the Audit Risk (AR) Model to Determine Required Evidence Mix to use in Audit Program. Uses audit program to achieve audit objectives which in turn checks management assertions

Question 7

What are the Auditing Procedures Required

Answer 7

1. Physical Examination
2. Observation
3. Inspection
4. Reperformance
5. Recalculation
6. Confirmation
7. Inquiries
8. Analytical Procedures

Question 8

Control Risk Audit Procedures

Answer 8

• Consider Control Environment
• Review Documentation of Sales Processing
• Identify KEY controls (existence or absence)
• Assess control risk
• Planned detection risk (determined with CR / IR. If they are high, increase sample sizes. Based off of AAR)

Question 9

Important Inventory Based Audit Procedures

Answer 9

• Analytical Procedures
• Stocktake attendance
• Pricing and compilation
• Inventory valuation and cut off
• These procedures are all covered in ASA 501

Question 10

Steps to COMPLETE the audit

Answer 10

1. Review for contingent liabilities
2. Review for subsequent events
3. Accumulate final evidence
4. Evaluate results
5. Issue audit report
6. communicate with audit committee and management

Question 11

Audit Procedures for Finding Contingencies

Answer 11

1. Enquiry with management
2. Review income tax assessments / correspondence
3. Review minutes of meeting for indicators
4. Analyse legal expense and review invoice from solicitors
5. Obtain letter from solicitors
6. Litigation ASA 502

Question 12

What are the Subsequent Event Periods in Auditing

Answer 12

Period 1: Before the Audit Report, but after the Financial Period. Auditor must find
Period 2: After Audit Report but Before Financial Report - Auditor responsible if it comes to attention, but doesn’t need to actively look for it
Period 3: After Financial Report - auditor not responsible unless it existed at date of audit report

Question 13

What are the procedures for final evidence accumulation?

Answer 13

1. Perform final analytical procedures
2. Evaluate going concern assumption
3. Obtain a management representation letter
4. Consider information accompanying basic financial statements
5. Read other information in the annual report

Question 14

What is the basic format of an Audit Report? (ASA 700, 701, 705)

Answer 14

• Title
• Addressee
• Intro Paragraph
• Responsibilities for those charged with governance for financial report
• Auditor responsibilities
• Auditor opinion
• Other reporting responsibilities
• Auditor signature
• Auditor Address
• Date of report

Emphasis of Matter:
- Issues significant enough to be included in the disclosure

Question 15

Concept of Negligence

Answer 15

1. Auditor did not follow auditing standards
   OR
2. Did not detect fraud or error that should reasonably have been detected (reasonable persons test)

Question 16

Major Sources of Auditor Liability

Answer 16

• Client

- Third Party

Question 17

Liability to Clients: What are the two ways this comes about

Answer 17

1. Engagement Letter (ASA 210)
2. Common Law Duties
   - London and General Bank
   - Kingston and Cotton Mill
   - Pacific Acceptance Corporations ltd v Forsyth

Question 18

What does London and General Bank Ltd (1985) Establish

Answer 18

That the duty is to report to the shareholders, not the owners

Question 19

What does Kingston Cotton Mill Co Establish

Answer 19

Reasonable Persons Test

Question 20

What is established by the Pacific Acceptance Corporations Ltd v Foresyth (!930) Case

Answer 20

Pacific Acceptance Establishes the Duties Owed by the Auditors to the Client

• Duty to use reasonable care and skill
• Duty to check and see for themselves
• Audit the whole year
• Appropriately supervise and review
• Properly document procedures
• Duty to warn and inform approbate level of management
• Duty to take further action where suspicion is aroused
• Reliance on others is not a substitute for auditors own procedures
• Expectation of discovering material error or for

Question 21

What is required for a legal action to succeed against the auditor (if the Client = Shareholders)

Answer 21

1. That there has been negligence
2. That the client has suffered a financial loss
3. That the loss must have been REASONABLY FORESEEABLE and a DIRECT RESULT of the negligence

Question 22

What are the requirements for a legal case to be brought against an auditor (for a third party)

Answer 22

FIRSTLY: Foreseeability and Proximity

• Duty of care must be owed to the third party. This is the case if:
• the auditor was made aware of the particular party
• the auditor new the nature of their reliance on the accounts
• and the information must be made with the intention to induce the recipient to act

SECONDLY:

• the auditor must have been negligent (duty of care)
• 3rd party must suffer a loss relying on the audited financial statements

This is supported by Esanda Finance

Question 23

What does Esanda Finance v Peat Marwick establish?

Answer 23

The auditor liability to third parties