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Auditing > International Standards On Auditing > Flashcards

International Standards On Auditing Flashcards

1
Q

Discuss the auditors responsibilities for identifying on non compliance with laws and regulations?

A
  1. The auditor when planning and performing audit procedures and is evaluating reporting should recognize that non compliance by the entity may materially affect the financial statement
  2. Auditor is not and cannot not be held responsible for preventing non compliance. The annual audit may act as a deterrent
  3. Auditor should plan and perform the audit with attitude of. Professional skepticism recognizing that audit may reveal instances of non compliance
  4. Auditor should obtain general understanding of the legal and regulatory framework applicable to the entity and industry and how the entity is comply with framework
  5. Auditor should perform procedures to help identify instances of non compliance generally recognized as having an effect on the determination of the material amounts and disclosure in the financial statements
  6. In the absence of other sufficient appropriate audit evidence the auditor should obtain written presentation from management that all known actual or possible non compliance have been disclosed
  7. When non compliance is discovered the auditor should:
    - obtain an understanding of the nature of the act
    - obtain sufficient audit evidence and document the findings
    - discuss the matter with management
    - if necessary consult with legal advisers
  8. If the auditor cannot obtain sufficient information regarding the suspected non compliance the auditor should consider the implications for other aspects of the audit particularly reliability of management representations and the effect of the lack of evidence on the audit opinion
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2
Q

Discuss the auditors responsibilities for reporting on non compliance with laws and regulations?

A
  1. To management
    - if no audit committee, report to board immediately
    - if suspects a member of senior staff may be involved, report to directors
  2. To members of the entity
    - if has material effect on the financial statements and not properly reflect, auditor should issue a qualified or adverse opinion in the audit report
  3. To regulatory and enforcement authorities
    - would not report directly to regulatory bodies before reporting such non compliance to third party
    - if meet reportable irregularity the auditor need to consider his reporting responsibilities in accordance with the act
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3
Q

What is the auditors general responsibility regarding to prevention and detection of fraud?

A
  1. Maintain professional skepticism while performing the audit
  2. Hold discussions among audit team and how and where the entity’s financial statements are susceptible to fraud
  3. Make enquiries of management regarding their assessment of fraud and risk
  4. Make enquiries of management and others within the entity to determine whether they have knowledge of any actual or suspected or alleged fraud affecting the entity
  5. Enquire of those charged with governance of the entity how they exercise oversight of management fraud assessment of fraud risks and the internal controls that management established to mitigate these risks
  6. Obtain information directly from the internal auditors on their knowledge of actual, suspected or alleged fraud affecting the entity
  7. Discuss risk of fraud with internal auditors
  8. Evaluate whether unusual or unexpected analytical relationships point to material misstatement due to fraud
  9. Evaluate the presence of any fraud risk factors in the entity
  10. Consider whether other information obtained by the auditor indicate material misstatement due to fraud
  11. Treat fraud risks as significant risks
  12. Adapt the nature, timing and extent of planned further audit procedures at the assertion level to limit audit risk to an acceptable level
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4
Q

Discuss the quality control at firm level

A
  1. Leadership responsibility within the firm
    - cultural of quality in the performance of engagement
  2. Ethical requirement
    - comply with requirement of integrity and professional competence and due care and professional behavior and quality in terms of audit
  3. Acceptance and continuance of clients
    - evaluate the client’s integrity
  4. Requirements with regards to engagements performance on audit were not adhered to
    - apply policies to ensure direction, supervision and review of work on audit as well as to ensure consultation regarding problem clients and situations take place
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5
Q

Discuss quality control at audit level

A
  1. Leadership responsibility
  2. Ethical requirements
  3. Client evaluation at audit level
  4. Assignment of engagement team
  5. Engagement performance - direction, supervision and review
  6. Monitoring
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6
Q

What does ISQC 1 ‘quality control at firm level’ outlines?

A

Quality control for firms that perform audits and reviews of historical financial information and other assurance and related service engagements

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7
Q

What is the purpose and responsibility of ISQC1-quality control at firm level?

A

The purpose of the standard is to establish basic principles and procedures regarding a firm’s responsibilities for its system of quality control for audit and reviews of historical financial information and other assurance and related service engagements.

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8
Q

What is the objective of the firm in terms of quality control?

A

To establish a system of quality control to provide it with reasonable assurance that the firm and its personnel comply with the professional standards and regulatory and legal requirements, and ensuring that reports issued by the firm are appropriate in circumstances.

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9
Q

What are the elements of a firm’s system of quality control?

A
  1. Leadership responsibilities for quality control within the firm
  2. Ethical requirements
  3. Acceptance and continuance of client relationship
  4. Human resources
  5. Engagement performance
  6. Monitoring
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10
Q

What are some of the quality control policies for leadership responsibilities for quality control within the firm?

A
  1. Establish policies and procedures designed to promote internal culture of recognizing quality is essential in performing engagement
  2. The person assigned the operational responsibility for the firm’s quality control system shall have sufficient and appropriate experience and ability and the necessary authority to assume responsibility
  3. Work should be performed in accordance with professional standards and regulatory and legal requirements
  4. Report issued should be appropriate in the circumstances
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11
Q

What are some quality control procedures for leadership responsibilities within the firm?

A
  1. The assignment of management responsibilities for the engagement so that commercial considerations do not override the quality of work performed
  2. The firm’s policies and procedures addressing performance evaluation, compensation and promotion with regards to its personnel are designed to demonstrate the firm’s overriding commitment to quality
  3. The firm devotes sufficient resources for the development, documentation and support of its quality control policies and procedures
  4. The person assigned the operational responsibility for the firm’s system of quality control should have the necessary experience and ability to develop appropriate policies and procedures and the authority to implement them
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12
Q

What are some quality control policy for ethical requirement at firm level?

A

The firm shall establish policies and procedures to ensure all its personnel comply with the ethical requirements of:

  • integrity
  • objectivity
  • professional competence and due care
  • confidentiality
  • professional behavior
  • independence
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13
Q

What will the ethical requirement policies and procedures for quality control at firm level do?

A

They shall enable the firm to:

  • communicate its independence requirements to its personnel and other subject thereto
  • identify and evaluate circumstances and relationships that create threats to independence and to take appropriate actions to eliminate or reduce the threat to an acceptable level
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14
Q

What procedures of quality control can be implemented at firm level for ethical requirements?

A
  1. Communicate the independence requirements to its personnel
  2. Engagement partner(s) to provide the firm with information about client engagement to enable the firm to evaluate independence requirements
  3. Personnel should notify the firm of circumstances or relationships that may create threat of independence
  4. The firm should be notified immediately of breaches of any of its independence requirements
  5. Personnel should at least annually, provide written confirmation to the firm of compliance with its policies and procedures concerning independence (independence declaration)
  6. Criteria should be set to reduce familiarity threats to an acceptable level when the same personnel are used in an assurance engagement over a long period
  7. The engagement partner and review partner of listed entities should rotate after a specific period of time (IFAC = 7 years)
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15
Q

What are some policies for a firms quality control for acceptance and continuance of client relationship and engagement?

A

Acceptance and continuance of client relationship shall only take place after the firm has considered:

  1. If it is competent to perform the engagement and has the capabilities, time and resources to do so
  2. Whether it can comply with the ethical requirements
  3. The integrity of the client and has found no information that would lead it to conclude that the client lacks integrity
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16
Q

What procedures can be followed for quality control at firm level relating to acceptance and continuance of client relationship and engagements?

A
  1. Communication with existing or previous provider of professional accounting services
  2. Enquiries of firm personnel or third parties such as bankers, legal advisers, etc
  3. Background searches
  4. Documentation of all relevant facts, considerations and actions
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17
Q

What human resources policies should be implemented to ensure quality control at firm level?

A
  1. The firm’s personnel shall have the necessary skill, competence and commitment to ethical principles to perform engagement in accordance with professional standards and with regulatory and legal requirements and to enable the firm to issue reports that are appropriate in the circumstances
  2. Personnel performance evaluation, compensation and promotion give recognition to development, competence and commitment to ethical principles
  3. Assignment of staff to the audit:
    - the engagement partner and personnel assigned to the audit should have the capabilities, competence and time to perform a proper audit
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18
Q

What should the human resources policies address with regards to quality control at firm level?

A
  1. Recruitment
  2. Performance evaluation
  3. Skills
  4. Competence
  5. Career development
  6. Promotion
  7. Compensation
  8. Identifying of personnel needs
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19
Q

What procedures needs to be implemented to ensure that the human resources adheres to quality control at firm level?

A
  1. Capabilities and competence are developed through a variety of methods including the following:
    - professional education
    - continuous professional development, including training
    - work experience
    - mentoring by more experienced staff
    - independence education
  2. Personnel should be aware of the assessment criteria and counseling should be provided to personnel on performance, progress and career development
  3. Systems should exist to monitor the workload and availability of engagement partners to ensure they have sufficient time to discharge their responsibility
    - only staff with necessary experience and expertise required for the specific assignment should be assigned to the audit
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20
Q

What are some policies and procedures that can be implemented to ensure quality control within firm level for engagement performance?

A

The engagement shall be performed in accordance with professional standards and with regulatory and legal requirements
The firm should provide consistency in the quality of engagement performance through:
1. Guidance on performing audit
- firm manuals, software tools and standardized documentations
- industry and subject matter specific guidance material
2. Supervision
- tracking the progress of engagement
- considering the competence, skills and work of individual members
- significant findings and issues
- identifying matters for consideration or consultation by more experienced members of engagement team
3. Review
- more experienced engagement team members should review the work and findings of less experienced staff members

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21
Q

What policies and procedures can be implement to enhance the quality control at firm level with regards to consultation?

A

The firm shall establish policies and procedures designed to provide reasonable assurance that:

  • appropriate consultation takes place on difficult or contentious matters
  • sufficient resources are available to enable appropriate consultation
  • all consultations and conclusions therefrom are documented
  • conclusions resulting from consultation are implemented
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22
Q

What policies and procedures are used to ensure quality control within firm level with regards to differences of opinion?

A

Policies and procedures should exist to resolve differences between engagement team members, between those consulted and where appropriate between the engagement partner and the engagement quality reviewer

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23
Q

What policy is in place to ensure that engagement quality control review is adhered to at the firm level?

A

There should be a quality control review performed for all engagements of:

  1. Financial statements of listed entities
  2. Other significant audit and review engagement that fall within a firm’s review criteria
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24
Q

What procedures are there to ensure engagement quality control review is adhered to at firm level?

A
  1. Criteria should be set for when a quality review is required for non-listed and public sector entities
  2. The nature, timing and extent of a quality review should be defined
  3. The quality control review should be a person with the requisite technical qualifications and experience
  4. No audit report should be issued before the required quality control review prices has been completed
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25
Q

What would quality control review process normally include?

A
  1. Discussion with the engagement partner
  2. A review of the financial statements or other subject matter
  3. A review of selected engagement documentation relating to significant judgements made and conclusions reached by the engagement team
  4. A review of conclusions reached in formulating the report and consideration of whether the report is appropriate
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26
Q

What are some policies and procedures relating to engagement documentation to ensure quality control within firm level?

A
  1. Engagement file - should be assembled on a timely basis after the audit (max 60 days after the audit report)
  2. Confidentiality and safe custody of engagement documentation - all engagement documentation should be kept in such a manner they the confidentiality and safe custody thereof are maintained
  3. Retention - all engagement documentation should be kept for the period requested by law or regulation (min 5 years)
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27
Q

What monitoring policy should be established to ensure that quality control is met at firm level?

A

The firm shall establish policies and procedures to monitor compliance with the quality control systems and procedures to ensure it is relevant, adequate and operating effectively.
This can be done by inspection on a cyclical basis of completed engagement got each engagement partner.

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28
Q

What does ISA 200 deals with?

A

Quality control for audits of historical financial information (quality control at audit level)

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29
Q

What is the purpose and responsibility of ISA 200 - quality control at audit level?

A

To establish basic principles and procedures that will assist the auditor with his or her responsibility with regards to quality control for individual audit

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30
Q

What is the objective of ISA 200 - quality control at audit level?

A

To implement quality control procedures at the engagement level to provide reasonable assurance that the audit complies with professional standard and with applicable legal and regulatory requirements and that the reports issued is appropriate in the circumstances

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31
Q

What are some requirement for quality controls on audit?

A
  1. Leadership responsibilities for quality control
  2. Ethical requirements
  3. Acceptance and continuance of audit engagements
  4. Assignment of the engagement team
  5. Engagement performance
  6. Monitoring
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32
Q

What policy is set to ensure leadership responsibilities for quality of audit at audit level?

A

The engagement partner shall take responsibility for the overall quality of the audit

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33
Q

What procedures are implemented to ensure that leadership responsibilities for quality of audit at audit level?

A

The engagement partner should demonstrate through his or her actions and through appropriate communication to the engagement team the importance of:

  • performing work that complies with professional standards and with applicable regulatory and legal requirements
  • comply with the firm’s quality control policies and procedures as applicable
  • issuing an auditor’s report that is appropriate in the circumstances
  • the engagement team’s ability to raise concerns without fear of reprisals
  • the fact that quality is essential in performing audit engagement
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34
Q

What policy is set to ensure that ethical requirement is met for quality control at audit level?

A

Throughout the audit the engagement partner shall remain alert, through closer observation and enquiry for evidence of non compliance with the relevant ethical requirements by member of engagement team of:

  • integrity
  • objectivity
  • professional competence and due care
  • professional behavior
  • independence
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35
Q

What procedures are there to ensure that ethical requirements are met at the audit level?

A

Engagement partner should:

  • enquire as to and observe compliance with ethical requirements of the engagement team during the audit
  • identify and consider taking action to eliminate threats to independence concerning the audit engagement
  • form a conclusion on compliance with the independence requirement for the audit
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36
Q

What is the policy concerning acceptance and continuance if audit engagement for quality control at audit level?

A

The engagement partner shall be satisfied that appropriate procedures regarding the acceptance and continuance of client relationship and specific audit engagement have been followed and that conclusions reached in this regard are appropriate and have been documented.

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37
Q

What are some procedures relating to acceptance and continuance of client relationship for quality control at audit level?

A
  1. The integrity of the principle owners, key management and those in charged with governance of the entity
  2. Whether the engagement team is competent to perform the audit engagement and has the necessary time and resources
  3. Whether the firm and the engagement team can comply with the ethical requirements
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38
Q

What policy is in place to ensure quality control at audit level for assignment of engagement team?

A

The engagement partner shall be satisfied that the engagement team collectively possess the appropriate skill and abilities to perform the audit according to professional standards and applicable legal and regulatory requirements and issue report that is appropriate in the circumstances

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39
Q

List the procedures to ensure quality control within audit level for assignment of engagement team.

A

The engagement team as a whole should have:

  • an understanding of, and practical experiences with, audit engagements of a similar nature and complexity through appropriate training and participation
  • an understanding of professional standards and regulatory and legal requirements
  • technical knowledge and expertise, including knowledge of relevant information technology and of specialized areas of accounting and auditing
  • knowledge of relevant industries in which the client operates
  • the ability to apply professional judgement
  • an understanding of the firm’s quality control policies and procedures
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40
Q

What policies are there to ensure quality control within audit level for engagement performance?

A
  1. Direction, supervision and performance
    - engagement partner take responsibility for direction, supervision and performance of the engagement team in compliance with professional standards and applicable legal and regulatory requirements
  2. Consultation
    - engagement partner shall ensure that there is appropriate consultation between the engagement team and others at appropriate levels within the firm
  3. Difference in opinion
    - the engagement partner should ensure all difference of opinion are resolved
  4. Engagement quality review and other significant entities should meet the firm’s criteria
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41
Q

What policies and procedures are there to ensure quality control within audit level for monitoring?

A

The engagement partner shall ensure compliance with quality control in the audit engagement and that the firm’s requirements for quality control are adhered to

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42
Q

What does ISA 240 set out?

A

The auditor’s responsibility relating to fraud in an audit of financial statements

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43
Q

What constitutes a fraud?

A

An intentional act by one or more members of management, those charged with governance, employees of third parties. Examples:

  • use of deception to obtain an unjust or illegal advantage
  • intentional fraudulent financial reporting to deceive users
  • misstatements resulting from misappropriation of an entity’s assets
  • deliberate overriding of internal control by management
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44
Q

What is an error?

A

Unintentional errors in the financial statements.
Examples:
- mathematical or clerical errors
- oversight or misinterpretation of facts
- misapplication of accounting principles relating to measurement, recognition, classification, presentation or disclosure
- incorrect accounting estimate

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45
Q

What are the two types of intentional misstatements relevant to the auditor?

A
  1. Misstatements resulting from fraudulent financial reporting
  2. Misstatements resulting form the misappropriation of assets
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46
Q

How can management and those charged with governance are responsible for the prevention and detection of fraud?

A

By implementing and maintaining an efficient system of accounting and internal controls.
To place strong emphasis on fraud prevention and fraud deterrence. This involves a commitment to creating a culture of honesty and ethical behavior.
Audit committees can assist management in achieving these objectives

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47
Q

What is the responsibilities of the auditor for the prevention and detection of fraud?

A

Auditor is responsible for obtaining reasonable assurance that the financial statement taken as a whole are free from material misstatements whether due to fraud or error

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48
Q

ISA 315 requires a discussion among the engagement team on how and where the entity’ financial statement might be susceptible to material misstatements due to fraud, including how fraud might occur. What is the risk assessment procedures for this?

A

When performing risk assessment procedures in order to obtain information snout the entity and its environment, including the entity’s internal control, the auditor shall make inquires to management regarding the following:

  • management’s assessment of the risk that the financial statement may be misstated due to fraud
  • management’s process for identifying and responding to risk of fraud in the entity
  • management’s communication to those charged with governance regarding the process for identifying and responding to the risk of fraud in the entity
  • management’s communication to employees regarding its view on business practices and ethical behavior
  • any knowledge of actual, suspected or alleged fraud affecting the entity
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49
Q

What should the auditors also do with regards to risk assessment procedures?

A
  1. Obtain an understanding of how those charged with governance exercise oversight over management’s processes for identifying and responding to fraud risk
  2. Inquire from those charged with governance whether they have knowledge of any actual, suspected or alleged fraud affecting the entity
  3. Evaluate whether unusual or unexpected relationships that’ve been identified in performing analytical procedures may indicate risks of material misstatements due to fraud
  4. Evaluate whether other information obtained by the auditors indicate risk of materials misstatement due to fraud
  5. Evaluate whether information obtained from risk assessment procedures indicates that one or more risk factors are present
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50
Q

What are the responses to the assessed risks of material misstatement due to fraud?

A

In determining overall response, the auditor shall:

  • assign more experienced people to the audit team
  • evaluate whether the selection and application of accounting treatment may be indicative of fraudulent financial reporting resulting from management’s efforts to manage earnings
  • incorporate an element of unpredictability in the selection of the nature, timing and extent of audit procedures to be performed.
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51
Q

The auditors should perform specific procedures regarding the risk relating to management’s override of controls, what are they?

A
  1. Test the appropriateness of journal entries recorded in the general ledger and other adjustments made in the preparation of the financial statement
  2. Review accounting estimates for biases
  3. Consider the business rationale for transactions which are outside the normal course of business for the entity
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52
Q

The auditor plans and performs an audit with an attitude of professional skepticism so as to identify and properly evaluate the following…

A
  1. Factors which increases the inherent and or control risk of material misstatement
  2. Circumstances which make the auditor suspect that the financial statements are materially misstated
  3. Conditions observed or evidence obtained which brings the reliability of management representations into question
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53
Q

Auditors should obtain written representation that management…

A
  1. Has disclosed to the auditor all facts relating to any fraud or possible fraud known to management that may have affected the entity
  2. Believes the effects of those uncorrected financial statements misstatements aggregated by the auditor during the audit are immaterial both individual and in the aggregate to the financial statements taken as a whole.
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54
Q

What actions should the auditor take when audit procedures indicate the possible existence of fraud and errors?

A
  1. Consider the effect of the fraud or error on the financial statements
  2. If the effect is material, additional or amended procedures need to be performed to obtain more evidence of the fraud or error.
  3. Adjust the nature, timing and extent of the the substantive procedures accordingly
  4. If the adjusted procedures indicate the existence of fraud or error, the auditor should:
    - discuss the matter with management or preferably audit committee
    - consider whether the matter is properly disclosed in the financial statements
    - consider the effect on the audit report
  5. Consider the effect of the fraud or errors on:
    - other aspects of the audit
    - the reliability of management’s representation
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55
Q

What are the additional or amended procedures depend on to be performed by the auditor when audit procedures indicates possible fraud or error?

A
  1. The type of fraud or error indicated
  2. The likelihood of occurrence
  3. The materiality thereof on the financial statements
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56
Q

The auditor should, as soon as is practically possible, report his or her findings to management and consider the need to report such matters to those charged with governance when…

A
  1. The existence of fraud suspected, even if the effect on the financial statements is not material
  2. Fraud and material misstatements are detected
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57
Q

Matters to be considered to be communicated to those charged with governance with regards to fraud and error include…

A
  1. Question regarding management competence and integrity
  2. Fraud involving management
  3. Other fraud that results in a material misstatements of the financial statements
  4. Material misstatement arising from error
  5. Misstatements that indicate significant weaknesses in internal control, including the design or operation of the entity’s financial reporting process
  6. Misstatements that may cause future financial state to to be materially misstated
  7. Creative accounting issues
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58
Q

What would reporting in respect of fraud entail?

A
  1. The reporting thereof to a higher level of authority than the person involved
  2. If senior management is involved:
    - report it to a higher authority, e.g. Audit committee or other non exec directors
    - if there is no higher level, if the report is being ignored or if the auditor is not sure to whom to report the matter, legal advice needs to be obtained
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59
Q

Is reporting to third parties of fraud allowed?

A

No, as it is prohibited by the auditors ethical and legal responsibilities of confidentiality. However in certain circumstances, the auditor may have a statutory duty to report fraud and material error to the supervisory authorities. If the action can be considered as reportable irregularity the auditor must report it to IRBA

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60
Q

If the auditor concludes that it is not possible to continue performing the audit and it is necessary to withdraw as a result of a misstatements arising from fraud or possible fraud, what should the auditor do?

A
  1. Consider the professional and legal responsibilities applicable in the circumstances
  2. Discuss with the appropriate level of management and those charged with governance the reason for the withdrawal
61
Q

The auditor may encounter exceptional circumstances that bring into question the auditors ability to continue performing the audit, for example…

A
  1. The entity does not take the remedial action regarding fraud and that the auditor considers necessary
  2. The auditors consideration of the risk of material misstatements arising from fraud and the result if the audit tests indicate a significant risk of material and pervasive fraud
  3. The auditor has significant concern about the competence or integrity of the executive management or those charged with governance
62
Q

List the risk factors relating to misstatements arising from fraudulent financial reporting.

A
  1. Management is dominated by a single person and there is no effective supervisory board or committee
  2. A complex corporate structure exists where complexity is not warranted
  3. Continue failure to correct material weaknesses in internal control timeously
  4. High turnover ratio of key accounting and financial personnel
  5. Significant and prolonged personnel shortage in the accounting department
  6. There is excessive interest by management in maintaining or increasing the entity’s share price
  7. Management has an interest in pursuing inappropriate means to minimize reported earnings for tax motivated reasons
  8. There is a strained relationship between management and the current or previous auditor
  9. There is a history of law violations or claims against the company
  10. Management continues to employ ineffective accounting, information technology or internal audit staff
  11. Management does not monitor significant controls regularly
  12. Management sets unduly aggressive financial targets
  13. Regular changes in legal counsel, senior management or board members
  14. Management has a poor reputation in the business community and a disregard for regulatory authorities
  15. A significant portion of managements remuneration compensation is represented by bonuses, share options and other incentives
63
Q

What are some risk factors from misstatements arising from misappropriation of assets?

A
  1. Large amounts of cash on hand
  2. Inventory characteristics, such as small size combined with high value and high demand
  3. Easily convertible assets, such as bearer bonds, diamonds or computer chips
  4. Fixed asset characteristics such as small size combined with marketability and lack of ownership identification
  5. Lack of appropriate management oversight
  6. La k of procedures to screen job applicants for positions where employees have access to assets susceptible to misappropriation
  7. Inadequate record keeping for assets susceptible to misappropriation
  8. Lack of an appropriate segregation of duties
  9. Lack of an appropriate system of authorization and approval of transactions
  10. Poor physical safeguards over cash, investments, inventory or fixed assets
  11. Lack of timely and appropriate documentation for transactions
  12. Lack of mandatory vacations for employees performing key control functions
64
Q

What is a reportable irregularity?

A
  • Any unlawful act or omission
  • committed by management and which
    • has caused financial loss
    • is fraudulent or amounts to theft or
    • represents a material breach of fiduciary duties
65
Q

When should a auditor report to IRBA of reportable irregularity?

A

Immediately without delay.

66
Q

What happens after the auditor has reported to IRBA of the reportable irregularity?

A

Within three days of the report, the auditor must notify the members of the management board of the entity, in writing, of such report.
The auditor must as soon as it is reasonably possible but no later than 30 days from the date which the report was sent do the following:
- take all reasonable measures to discuss the report with the management
- afford the members of the management board an opportunity to make representations in respect of the report and
- send and other report to IRBA which must indicate a statement that the auditor is of the opinion that:
- no reportable irregularity has taken place or is taking place
- the suspected RI is no longer taking place, steps has been taken to prevent or recover the losses
- the RI still exist

67
Q

Under what circumstances will an auditor be sued?

A
  1. Breach of contract
    - have to proof contractual relationship
    - have to proof breach of conduct
    - have to proof that loss was suffered as a result of breach
  2. Common law delict
    - the incorrect stated financial position of the company was an intention or negligent misrepresentation by the auditor
    - the auditor knew that the financial statements will be relied upon
    - the loss suffered by the third parties was caused by relying in the incorrect financial statements
    - the loss suffered was a financial loss
    - the auditor failed to observe the necessary degree of care and skill while performing the audit
  3. Liability under section 46 of the Auditing Profession Act 26 of 2005
    - auditor acted maliciously, fraudulently or negligently during the performance of their work, he or she can be held liable for damages.
68
Q

Management is responsible for the compliance and the prevention and the detection of non compliance with laws and regulations. Management may comply with these responsibilities by doing the following…

A
  1. Identifying and monitoring legal requirements and ensuring compliance there with
  2. The implementation and maintenance of internal control
  3. The implementation and enforcement of a code of conduct within the enterprise
  4. Ensuring that employees are properly trained and understand the code of conduct
  5. Monitoring compliance with the code of conduct and implementing disciplinary measures in cases of non compliance
  6. Engaging legal advisers to monitor compliance with legal requirements
  7. Maintaining a register if significant laws with which the entity must comply and keeping a record of complaints of non compliance
  8. Introducing an internal audit function
  9. Introducing an audit committee
69
Q

What are the auditors responsibility for compliance with laws and regulations?

A
  1. Non compliance with laws and regulations by the entity may result in a material misstatement in the financial statements. The audit should identity and assess possible misstatements due to non compliance
  2. The auditor is not and cannot be held responsible for preventing non compliance
  3. The auditor is responsible for verifying compliance by obtaining sufficient appropriate audit evidence of laws and regulations which have a direct effect on the determination of material amounts and disclosures in the financial statements such as tax and pension laws and regulations
  4. The auditor must also help to identify non compliance with other laws and regulations that could lead to material penalties or litigations which would also affect the financial statements
70
Q

List the indicators of possible non compliance with laws and regulations.

A
  1. Investigation by government department, payment of fines or penalties
  2. Payment for unspecific services, or loans to consultants, related parties, employees or government officers
  3. Sales commission or agent’s fees that seem excessive in terms of normal payments by the entity or industry for services actually received
  4. Purchases at prices that are materially higher or lower than market prices
  5. Unusual transactions with companies registered in tax havens
  6. Payments for goods or services to countries other than the course of origin
  7. Payments without sufficient exchange control documentation
  8. Existence of an information system that does not show an audit trail or sufficient audit evidence
  9. Unauthorized or improperly recorded transactions
  10. Adverse media reports or comments
71
Q

Communication to those charged with go nance should create a two way communication process which could be important in assisting the following…

A
  1. The auditor and those charged with governance in understanding the matters related to the audit
  2. The auditor in obtaining information relevant to the audit
  3. Those charged with governance in fulfilling their responsibility to oversee the financial reporting process
72
Q

The following should be communicated to those charged with governance.

A
  1. The responsibilities of the auditor in relation to the financial statements audit
  2. Planned scope and timing of audit
  3. Significant findings from the audit
  4. Issues regarding auditors independence
73
Q

How should the communication to those in charged with governance be carried out?

A
  1. In writing

2. Timely basis

74
Q

The auditor shall design and perform audit procedures that are appropriate in the circumstances for obtaining sufficient and appropriate audit evidence to reduce audit risk to an acceptably low level and thereby enable the auditor to draw conclusions on which to base the audit opinion, true or false?

A

True

75
Q

The audit evidence obtained should be the following.

A
  1. Sufficient - right quantities and right quality

2. Appropriate - relevant and reliable

76
Q

What are the procedures for obtaining audit evidence?

A
  1. Risk assessment procedures
  2. A combination of tests of controls and substantive procedures
  3. In some circumstances, entirely from substantive procedures
77
Q

The risk assessment procedure will identify risks at two levels, what are they?

A
  1. The overall financial statement level, affecting the entity as a whole
  2. The assertion level for each significant classes of transaction and account balance
78
Q

Risk assessment procedures are performed to obtain information during which stages of the audit engagement?

A
  1. The engagement review of new and exiting clients
  2. The planning of the audit at the overall financial statement level
  3. The detailed planning of the audit of significant classes of transactions, account balances and disclosures
79
Q

Risk assessment procedure consist of:

A
  1. Enquiries of management and others within the entity
  2. Observation and inspection
  3. Analytical procedures
80
Q

What are risk assessment procedures?

A

These are procedures performed to obtain an understanding of the entity and its environment, including entity’s internal controls to identify and assess the risk of material misstatements, whether due to fraud or error, at the financial statement and assertion levels (information gathering process)

81
Q

What are tests of controls?

A

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

82
Q

Specifically what will tests of control test?

A
  1. The suitability of the design of the internal controls to prevent, detect and correct material misstatements
  2. The existence and effective operation of the system throughout the period of reliance
83
Q

What are substantive procedures?

A

These are audit procedures designed to detect material misstatements at the assertion level

84
Q

What does substantive procedure consist of?

A
  1. Tests of details of transactions, balances and disclosures
  2. Substantive analytical procedures
85
Q

What will the nature, timing and extent of substantive procedures depend on?

A
  1. The risk of material misstatement of the financial statement assertions
  2. The appropriateness and reliability of audit evidence that can be obtained by means of substantive procedures
  3. The results of the tests of controls (effectiveness of internal controls)
86
Q

The auditor must design and perform substantive procedures for each significant class of transaction, accounts, balances and disclosure. This depending on the circumstances, consist of the following…

A
  1. Substantive analytical procedures only

2. A combination of substantive analytical procedures and test of details

87
Q

What are some methods of obtaining audit evidence?

A
  1. Inspection of records or documents and of tangible assets
  2. Observation of a process or procedure
  3. Making inquiries of knowledgable persons, both financial and others, from the entity or outside the entity
  4. External confirmation on the information as a written response to the auditor from a third party
  5. Recalculation of the mathematical accuracy of documents or records
  6. Re performance by the auditor, manually or through CAATs, of procedures or controls that were originally performed as part of the entity’s internal control
  7. Analytical procedures (analyses) of financial and non financial data
88
Q

The hierarchy of the importance of audit evidence is as followed

A
  1. Source
    - external audit evidence obtained directly by the auditor is better than internally generated evidence
    - internally generated evidence is more reliable when the internal controls are functioning effectively
    - audit evidence that the auditor obtains directly is more reliable than evidence supplied by the clien
  2. Nature
    - written evidence (in documentary form) is better than oral representation
    - original documents are more reliable than evidence provided by photocopying or fax
89
Q

What further considerations are there relating to audit evidence?

A
  1. The auditor must obtain audit evidence for each assertion in the financial statements
  2. Audit evidence is often more persuasive than conclusive
  3. Audit evidence from different sources or of a different nature is inconsistent, the auditor must reform additional procedures to resolve the inconsistency
  4. Considerations should be given to the cost involved in obtaining audit evidence and usefulness thereof
  5. If unable to obtain sufficient appropriate audit evidence, the author
90
Q

When using an information produced by the entity the auditor should consider if the information is…

A

Sufficient and reliable

91
Q

Who is a management’s expert?

A

An individual or organization possessing expertise in a field other than accounting or auditing whose work in that field is used by the entity to assist the entity in preparing the financial statements

92
Q

What considerations affect the nature, timing and extent of the auditors procedures required to reply on the work of expert?

A
  1. The nature and complexity of the matter to which the management expert relates
  2. The risk of material misstatement of the matter
  3. The availability of alternative sources of audit evidence
  4. The nature, scope and objective of the expert’s work
  5. Whether the management expert is employed by the entity or is a party engaged by it to provide relevant services
  6. The extent to which management can exercise control or influence over the work of management expert
  7. Whether management expert is subject to technical performance standards or other professional or industry requirements
  8. The nature and extent of any controls within the entity over the management expert’s work
  9. The auditors knowledge and experience of the management expert’s field of expertise
  10. The auditors previous experience of the work of the expert
93
Q

What are the procedures for auditor to rely on management expert’s work?

A
  1. Evaluate the expert’s competence, capabilities and objectivity
  2. Obtaining an understanding of the work of the expert
  3. Evaluating the appropriateness of the expert’s work
94
Q

How does an auditor obtain an understanding of the work of the expert?

A
  1. The nature, scope and objectivity of the expert’s work
  2. Any professional standards, regulations and laws that apply
  3. The assumptions and methods used
  4. The nature of internal and external data used
95
Q

When evaluating or testing the appropriateness of the expert’s work, what should the auditor take into consideration?

A
  1. The relevance and reasonableness of the expert’s finding and consistency thereof with other audit evidence
  2. The relevance and reasonableness of the assumption used
  3. The relevance, completeness and accuracy of the source if data used
96
Q

What are the assertions about classes of transactions and event for the period under audit?

A
  1. Occurrence
    - transactions and events that have been recorded have occurred and pertain to the entity
  2. Completeness
    - all transactions and events that should have been recorded have been recorded
  3. Accuracy
    - amounts and other data relating to recorded transactions and events have been recorded appropriately
  4. Cut off
    - transactions and events have been recorded in the correct accounting period
  5. Classification
    - transactions and events have been recorded in the correct accounts
97
Q

What are the assertions for account balances at the end of the period?

A
  1. Existence
    - assets, liabilities and equity interests exist
  2. Rights and obligations
    - the entity holds or controls the rights to assets and liabilities are the obligations of the entity
  3. Completeness
    - all assets, liabilities and equity interests that should have been recorded have been recorded
  4. Valuation and allocation
    - assets, liabilities and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded
98
Q

What assertions are for presentation and disclosure?

A
  1. Occurrence and rights and obligations
    - disclosed events, transactions and other matters have occurred and pertain to the entity
  2. Completeness
    - all disclosures that should have been included in the financial statements have been included
  3. Classification and understandability
    - financial information is appropriately presented and described and disclosures are clearly expressed
  4. Accuracy and valuation
    - financial and other information is disclosed fairly and at appropriate amount
99
Q

The auditor shall design and perform procedures to identify litigation and claims involving the entity that may give rise to the risk of material misstatements by doing the following…

A
  1. Enquiry of management and internal legal council
  2. Reviewing minutes of management and internal legal council
  3. Reviewing legal expense account
  4. Enquiry of external legal council
100
Q

The auditor should obtain sufficient appropriate evidence that the presentation and disclosure of all segment information are in accordance with the requirements of the accounting standards, how should an auditor do this?

A
  1. Obtaining an understanding of the methods used in the preparation and compiling of segment information
  2. Testing the methods applied
  3. Performing analytical procedures and or other procedures as considered necessary
101
Q

The auditor should, on a timely basis, prepare audit documentation that provides the following…

A
  1. A sufficient and appropriate record of the basis for the auditors report
  2. Evidence that the audit was performed in accordance with ISAs
102
Q

What does audit documentation comprises of?

A

It comprises of the record of audit procedures performed, audit evidence obtained and conclusion reached and is normally referred to as working papers

103
Q

What does working paper do for the auditor?

A
  1. Assist the audit team in the planning and performing of the audit
  2. Assist in the supervision and review of audit work
  3. Serve as proof of the work done to support the audit opinion, thus enabling the audit team to be accountable for its work
  4. Enable the conduct of quality control reviews by the firm or by external parties in accordance with applicable legal and regulatory requirements
104
Q

What information should be documented in the working paper?

A
  1. Audit procedures
    - the nature, timing and extent thereof
    - the results and findings thereof
    - significant matters arising, conclusion thereon and significant professional judgement applied
  2. Documentation of findings
    - details of items
    - who performed, tested and review the work
  3. Significant matters discussed with management
  4. How identified inconsistencies were resolved
  5. Reasons for a departure from requirements of an audit standard and the alternative procedures performed
  6. For matters arising after the date of the auditors report, the circumstances thereof, and procedures performed thereon.
105
Q

What is a permanent audit file?

A

It contains information of a permanent nature applicable to recurring audits. They should be updated annually.

106
Q

What is a current audit file?

A

Contains information of the current year’s audit

107
Q

Property and confidentiality of the working papers

A
  1. Working papers are the property of the auditor
  2. The auditor should adopt appropriate procedures for maintaining the confidentiality and safe custody of the working papers
  3. It is appropriate that follow up auditors gain access to the previous auditor’s working paper (client consent required)
108
Q

What are the requirements of working paper?

A
  1. Have heading
  2. Be dated
  3. Identify the compiler
  4. Identify the reviewer
  5. Identify the applicable information
  6. Be cross referenced
  7. Contain conclusions
109
Q

Discuss the assembly of the final audit file.

A
  1. This should become on a timely basis after the date of the auditors report
  2. This refers only to the assembly of the file and administrative issues and does not involve the performance of new audit procedures or the obtaining of audit evidence
  3. When the auditor finds it necessary to modify existing audit documentations or add new documentation after assembly of the file, he or she should document that it was done, who it was done by and the specific reasons therefore
110
Q

What is an external confirmation?

A

External confirmation is audit evidence obtained as a direct response to the auditor from a third party (the confirming party) in paper, electronic or other form

111
Q

Why is external confirmation considered as effective?

A
  1. External confirmations are more reliable than internal evidence
  2. Written evidence is more reliable the oral evidence
  3. Evidence obtained directly by the auditor from third parties provides the highest level of audit assurance
112
Q

What are external confirmation usually used for?

A

To verify account balances but are also suitable for confirmation of the terms of agreements, contracts or transactions with third parties

113
Q

Situations where external confirmations may be used include the following…

A
  1. Bank balances and other information
  2. Account receivable balances
  3. Inventory held by third parties
  4. Share certificates held by third parties
  5. Title deeds and investment certificates held by third parties
  6. Loan balances
  7. Account payable balances
114
Q

What will the reliability of external confirmation depend on?

A

Procedures applied by the auditor in respect of the following

  1. The design of the confirmation required
  2. Performance of and control over the confirmation procedures
  3. The evaluation of the results of the confirmation procedures
115
Q

What is a positive confirmation?

A

A positive confirmation request asks the respondent to respond directly to the auditor in all cases and is ordinarily expected to provide audit evidence with a high level of reliability

116
Q

What is a negative confirmation?

A

A negative confirmation request asks the respondent to respond only in the event of disagreement with the information provided in the request. Negative confirmations provide less persuasive audit evidence than positive confirmations

117
Q

When will negative confirmations be appropriate to reduce risk?

A
  1. The assessed risk of material misstatements is low
  2. A population consist of large number of small items
  3. A low expectation rate is expected
  4. No reason exists to believe that respondents will disregard these requests
118
Q

If management refuses to allow the auditor to send a confirmation request, the auditor shall do the following

A
  1. Enquire as to management’s reasons for the refusal and consider the validity and reasonableness thereof
  2. Consider the impact on the risk of material misstatement, including the risk of fraud
  3. If possible, perform alternative procedures to obtain the evidence
119
Q

How should the auditor exercise control over confirmation process.

A

The auditor should exercise control over the confirmation process by

  • preparing the confirmation requests him or herself
  • sending the confirmation request him or herself
  • ensuring the requests are properly addressed
  • requesting responses to be sent directly to the auditor
120
Q

The auditor should evaluate whether the result of confirmation process, together with the results of other procedures, provide sufficient appropriate audit evidence, true or false?

A

True

121
Q

The auditor should perform alternative procedures where no response is received to a positive request, what are some of the alternative procedures?

A
  1. For account receivables, the inspection of subsequent payments of dispatch documentation
  2. For account payables, the inspection of subsequent payment of goods received
122
Q

The auditor should consider the reliability of responses requested. True or false?

A

True

123
Q

How is the reliability of responses of external confirmation affected?

A

By the respondent’s independence, authority to respond , knowledge of matter, etc

124
Q

The auditor should consider the reason and frequency of exceptions to confirmation requests and if necessary perform additional procedures to obtain audit evidence. True or false?

A

True

125
Q

The auditor should perform audit procedures to recognize fraud risk factors sulking from related party relationship and transactions and to ensure further that the entity’s related party relationship and transactions have been appropriately identified, accounted for and disclosed in the financial statement. True or false

A

True

126
Q

What are the auditors responsibility regarding related party relationship and transactions?

A
  1. Perform procedures to identify related party relationship and transactions (risk assessment procedures)
  2. Identify and assess the risk of material misstatements associated with related party relationship and transactions
  3. Procedures to address the risk of material misstatements associated with related party relationship and transactions (response to the risk of material misstatement)
  4. Evaluate the accounting and disclosure of the identified related partly relationship and transactions
  5. Further procedures
127
Q

How does the auditor perform procedures to identify related party relationship and transactions? (Risk assessment procedures)

A
  1. Discuss amongst the engagement team
  2. Enquire of management
  3. Obtain an understanding of the entity’s control over related party relationship and transactions
  4. Maintaining alertness for related party information when reviewing documents or records
  5. Share related party information with the engagement team
128
Q

What substantive procedures can be carried out as a response to the risk of material misstatements with related party relationship and transactions?

A
  1. Confirmation or discussion of the specifics of transaction with intermediate such as banks, lawyer, agent, etc
  2. Confirmation or discussion of the terms and conditions of the transactions with the parties
  3. Reading of the financial statements of related parties to obtain evidence of the accounting for such transactions in the related party books
129
Q

What are management representations?

A

Important source of audit evidence and an integral part of the information obtained by the auditor. It is evidence that management acknowledges its responsibility for the fair representation of financial statements

130
Q

What should the date and period of management representation letter be?

A

It should be dated as close to but not after the date of auditors report. The period covered should be the same as that of the financial statements

131
Q

Auditors consideration when doubt exists as to the reliability of representation received

A

He or she should perform audit procedures to attempt to resolve the matter and if it remains inconsistent with other audit evidence, consider the following:

  • the effect thereof on the reliability of other representation by management
  • the effect on the reliability of other audit evidence
  • the effect on the audit opinion
132
Q

If management refuses to provide written representation, what should the auditor do?

A
  1. Discuss the matter with management
  2. Reevaluate the integrity of the management
  3. Consider the effect thereof on the audit opinion
133
Q

What should the content of the representation be?

A
  1. Addressed to auditor
  2. Contain information as in ISA 580
  3. Signed by management
  4. Dated same as auditors report
134
Q

The auditor of the group financial statement should obtain sufficient appropriate audit evidence on which to base the audit opinion of the group
Accordingly, the group auditor should…

A
  1. Determine whether to act as auditor of the group financial statements
  2. Communicate with component auditor about the scope and timing of their work on the financial statement of components
  3. Obtain sufficient appropriate audit evidence about the financial information of the components and the consolidation process to express an opinion on the group financial statements
135
Q

What are the responsibility of the engagement partner for group audit?

A
  1. Decision on acceptance and continuance of the audit of the group
  2. The direction, supervision and performance of the group audit engagement
  3. The group auditors report
136
Q

Internal audit activities should include one or more of the following..

A
  1. Monitoring internal control
  2. Examining of financial and operating information
  3. Review of operating activities for the economy, efficiency and effectiveness of operations (performance audit)
  4. Review of compliance with laws, regulations and management policies
  5. Review of governance process
137
Q

Discuss the relationship between external and internal audit

A

External audit
- stand independent of the entity and is solely responsible for the audit opinion
- the primary concern is to determine whether the financial statements are free from material misstatements
Internal audit
- is a management function which objectives are determined by management and accordingly it is not independent of the entity

138
Q

What aspects to consider at the preliminary assessment of the internal audit function?

A
  1. Objectivity
  2. Technical competence
  3. Due professional care
  4. Communication
139
Q

If the external auditor plans to rely on the work of the internal audit, aspects that needs to be agree join and co ordinate should include the following…

A
  1. Timing of such work
  2. Extent of audit coverage
  3. Test levels
  4. Sampling methods
  5. Documentation of work performed
  6. Review and reporting procedures
  7. External auditors must be informed by internal auditor of finding or conditions that may affect the external audit
  8. External auditors should inform internal auditor of matters that may affect the internal audit
140
Q

The external auditor should evaluate and test the work of internal audit before reliance can be place thereon. What extent of testing should be done?

A
  1. The risk and materiality of the audit area concerned
  2. The preliminary assessment of the internal audit department
  3. The evaluation of specific work done by the internal audit
141
Q

The external auditor should evaluate and test the work of internal audit before reliance can be place thereon. What will the testing include?

A
  1. Examination of items already assessed by the internal audit
  2. Testing of similar items
  3. Observation of internal audit procedures
142
Q

What aspects are under consideration when evaluating and testing the work of internal audit?

A

Whether or not:

  1. Work is performed by persons having adequate technical training and proficiency as internal auditors and whether the work of assistants is properly supervised, reviewed and documented
  2. Conclusions are supported by sufficient appropriate audit evidence
  3. Conclusions are applicable
  4. Exceptions or unusual matters disclosed by the internal audit are properly resolved
143
Q

When using the work of an auditors expert, how will the appointment be made?

A

Internal or external

144
Q

Who is an expert?

A

A person or firm possessing special skills, knowledge and experience in a particular field other than auditing or accounting where work is used to assist the auditor to obtain sufficient appropriate audit evidence.

145
Q

What factors to consider in determining need to use an expert?

A
  1. The need to assist the auditor in understanding the entity and its controls and in identifying risk
  2. Whether management used an expert to assist them in preparing the financial statements
  3. The materiality of the financial statement items being considered
  4. The risk of material misstatement based on the nature and complexity of the item being considered
  5. The quality and quantity of other evidence available
146
Q

Factors to consider to determine to what extent reliance can be placed on the expert’s work.

A
  1. Assess the experts competence and capability
    - qualification, membership of professional bodies
    - experience and expertise
  2. Consider the experts independence and objectivity
147
Q

The auditor must agree to the following with the expert in an engagement letter- scope of the experts work

A
  1. The nature, scope and objective of the work
  2. The rules and responsibilities of the auditor and the expert
  3. The audit, timing and extent of communication between the expert and the auditor and the firm of the report on the work of the expert
  4. The experts duty to observe confidentiality requirements
148
Q

When evaluating the adequacy of experts work…

A
  1. Consider the appropriateness of the experts findings based on the auditors knowledge of the business and the results of other audit procedures
  2. Consider methods and assumptions
  3. Testing the source data used by the expert
  4. If the auditor is not satisfied, he or she could
    - discuss with expert
    - perform additional procedures
    - appoint second independent expert
    - qualify his or her audit report if necessary

Auditing (21 decks)

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