Kaplan Summary Notes Flashcards
1
Q
Two types of assurance engagements
A
Reasonable or Limited engagements
2
Q
Reasonable assurance engagements give what assurance level and conclusion?
A
High assurance level
Positive opinion / conclusion
3
Q
Limited assurance engagements give what assurance level and conclusion?
A
Moderate assurance level
Negative opinion / conclusion
4
Q
3 objectives of an audit (ISA 200) ?
A
- Obtain reasonable assurance the FS are free from material misstatement and properly prepared in accordance with an applicable financial reporting framework
- Report on FS
- Communicate with those charged with governance
5
Q
What are the 3 audit thresholds?
A
Co. Act 2006 states that small private limited companies are exempt from audit if they fulfill 2/3 below criteria:
- No more than 50 employees
- Turnover does not exceed £10.2 million
- Gross assets total does not exceed £5.1 million
6
Q
When will subsids not require an audit
A
Subsids will not require an audit if the parent can guarantee their liabilities.
7
Q
Which companies must have an audit even if they meet the rules for not having one
A
- Plcs
- Insurance companies and banks
- Where shareholders owning at least 10% of the shares ask for an audit
8
Q
Name 4 benefits of an audit
A
- Independent scrutiny of the business by experts
- Additional assurance may be necessary for 3rd parties (i.e banks)
- A growing audit will need an audit one day
- Subsidiary benefits of the audit (e.g reports to management)
9
Q
Who do statutory audits report to?
A
Shareholders
10
Q
Who do other (non-stat audits) assurance engagements report to?
A
Usually management
11
Q
What determines the scope of a statutory audit?
A
- Companies house act 2006
- ISAs
- Other audit regulations
12
Q
What determines the scope of other (non-stat audit) engagements ?
A
- Terms of the engagement
2. Relevant ISAEs or ISREs
13
Q
What do Stat audits report on?
A
They express an opinion on:
- The financial statements (True, fair and properly prepared)
- Certain other matters, i.e directors report is consistent with the FS
14
Q
Difference between reporting stat-audits vs other assurance engagements?
A
Stat audits are in the public domain once they are filed. Other engagements are likely to be restricted.
15
Q
State two main management responsibilities (and give examples)
A
- Managing the Business
- to achieve objectives
- to asses business risks - Fulfilling statutory duties under companies house act 2006
- safeguarding co. assets
- keeping proper accounting records
- Preparing company financial statements and delivering them to co’s house
- Ensuring the co. complies with applicable laws and regulations
16
Q
Define auditor’s reponsibilities
A
- To form an opinion on the financial statements
- true and fair
- properly prepared
- directors report consistent with the FS. - Identify any material misstatements whether caused by error, fraud or non-compliance. (Fraud risk should be communicated during internal planning meeting)
17
Q
List 5 fraud procedures
A
- Perform a fraud risk assessment
- Exercise professional scepticism
- Discuss fraud among the engagement team
respond appropriately to the assessed level of fraud risk - Respond appropriately to the asseed level of risk
- Consider the implications for other areas of the audit. E.g if fraud is suspected it may cast doubt on the reliability of the management representations.
18
Q
ISA 240 - When should suspected fraud be communicated with internal management ?
A
If the fraud does not cause material misstatement and management are not suspected of fraud
19
Q
ISA 240 - When should suspected fraud be reported to Shareholders?
A
When it causes a material misstatement or uncertainty in the financial statements
20
Q
ISA 240 - When should suspected fraud be reported to third parties?
A
Only when there is a duty to disclose
21
Q
ISA 250 - Define non-compliance assurance procedures
A
- Perform risk assessment
- Obtain evidence about compliance
- If non-compliance is suspected, document and discuss with management
22
Q
Where must any suspicions of bribery be reported?
A
National crime agency under the proceeds of crime act 2002
23
Q
What should anti-bribery policies focus on?
A
- Top level culture in which bribery is unaccceptable
- Risk assesment
- Due dilligence procedures taking a risk based approach
- communication to staff including training
- monitoring and review
24
Q
What is the Sarbanes-Oxley Act 2002
A
- CEO’s and CFO’s must attest tot he veracity of the financial statements (criminal penalties apply for false attestations)
- Greater disclosures must be made to the financial statements during the audit process
25
What are the main implications of the Sarbanes-Oxley Act FOR THE AUDITOR?
- Stricter enforcement of auditor independence rules
- Public company accounting oversight board can inspect audit files of US listed companies, including subsidiaries based overseas
26
What are auditors responsibilities for related party transactions?
(ISA 550)
1. Obtain a list of all related parties from management
2. Carry out detailed tests of transactions and balances, looking out for related party transactions
3. Review minutes of meetings with shareholders and directors (where related party transactions could have been disclosed
4. Review bank confirmation letters for evidence of guarantor relationships
5. Reviewing investment transactions e.g identifying new subsidiaries which are related parties
6. Confirming that correct disclosures have been made in the financial statements
7. Obtain written management representations confirming that all related party transactions have been disclosed
PROFESSIONAL SKILLS - ASSIMILATING AND USING INFORMATION
27
What are auditors responsibilities in relation to money laundering?
1. Report actual or suspected money laundering to the firms money laundering nominated officer
2. Money laundering officer reports to the NCA if necessary
3. Avoid tipping off client
PROFESSIONAL SKILLS - APPLYING JUDGEMENT
28
What assurance engagement standards are applicable across ALL assurance engagements? (4)
1. Ethical standards
2. Risk assessment
3. Terms of engagements
4. ISQC's
29
What additional regulations do audit engagements need to follow?
Companies Act 2006
ISAs
30
IAASB
Subsid of IFAC
| Develops international standards, issuning ISAs, ISQCs and other standards
31
Role of FRC
Supervises UK acountancy issues
Issues (UK) ISA's
Issues guidance on ethical standards, practice notes and bullteins etc.
32
Current audit issues
- Harmonisation
- Professional skeptism
- Newer considerations - big data, future of audit, joint audits, climate change and technological advancements
33
Fundamental ICAEW ethical principles
integrity
objectivity
Professional competence and due care
Confidentiality
Professional behaviour
34
Threats to objectivity and independence
Self-interest threat
Self review threat
Advocacy threat
Familiarity threat
Intimidation threat
Management threats
PROFESSIONAL SKILL: APPLYING JUDGEMENT TO ETHICAL THREATS
35
Define PIE entities
Public interest companies
36
What non-audit services are PIE audit clients allowed to use?
There is a full list of all permitted services for PIE audit clients. If the service is not on the list it cannot be offered to the PIE audit client.
The full list is at paragraph 5.40
37
What non-audit services can be offered to non-PIE audit clients?
ethical threats should be evaluated on a case by case basis. If the threat exists, safeguards must be applied, or where not possible, the firm must withdraw from the engagements.
38
Name 3 provisions available for audits of small entities
1. No requirement for independent quality control review if the fees are expected to exceed 10% (but not 15%).
HOWEVER this should be disclosed to the Ethics Partner and those charged with governance at the client
2. The firm will not need to apply safeguards to address the self-review threat provided if there is:
- informed management
- more regular 'cold review' of audits where non-audit services have been provided
- Disclosure of the non-audit services in the audit report.
3. The firm doesn't have to resign if an audit partner joins the client IF:
- there is no significant threat to the audit team's integrity, objectivity and independence
- Disclosure of the partner joining the firm is made in the audit report.
39
Define an accountants duty of confidentiality
An accountant:
* shouldn't disclose client info unless there is a duty or right to do so
* should take all reasonable steps to preserve confidentiality
* should not use confidential information for personal advantage
40
When would an accountant have a duty to disclose?
if required by regulator, ordered by a court, if there is a technical/professional standard (e.g money laundering or terrorism), AND to comply with quality review of professional body.
41
When would an accountant have a right to disclose?
Client permission granted, public interest or to defend the firm/provide evidence in legal proceedings
ACCIDENTAL DISCLOSURE IS ONE OF THE LARGEST RISKS IN THIS AREA. PROFESSIONAL SKILL TO APPLY JUDGEMENT
42
If a conflict of situation arises, then what should the audit firm do?
1. Notify the clients of the situation and seek their consent to continue to act
2. If the firm continues to act for the two clients whose interest are in conflict, then appropriate safeguards include:
- separate teams
- info barriers
- confidentiality agreements signed by employees and partners
- review of application of safeguards by an independent partner.
43
Benefits and issues with social media
Benefits:
- sharing experiences
- creating engagement in debate
- raising awareness / profiles
Issues:
- Confidentiality breaches
- Critisism
- lack of integrity / professional behaviour
- offensive posts
- illegal acts
44
Define consequences of poor quality control
ICAEW:
- issue fines
- discpiplinary action
- withdrawal of the firm's authorisation to carry out audits
```
Other
-claims for negligence
- payment for damages
- impact on reputation
Companies act states it's an offence to recklessly cause audit report to be misleading or false
```
45
What are the components of a system of QC in a firm?
- Leadership responsibility for quality within the firm
- ethical requirements
- acceptance and continuance of client relationships and specific engagements
HR
- Engagement performance
- Monitoring
- Documentation
46
Define 'EQCR'
'Engagement quality control review'
Also known as a 'hot review'
It is an independent evaluation of the significant judgements the team has made and conclusions reached in forming the conclusion it reached in forming the opinion.
Aim to prevent inappropriate opinion being issued
Usually for listed or high risk clients
47
Define 'cold review'
Monitoring
To ensure compliance with the firms procedures and ISAs, ethical standards and other ethical standards and regulations.
To identify areas of improvement
Should be done on an on-going basis using a sample of audit files
48
What are audit committees of listed companies required to do as part of the UK Corporate Governance Code
Review and monitor the independence, objectivity and effectiveness of the external auditor.
49
How can audit firms limit liability
1. Professional indemnity insurance
2. LLP's
3. Liability caps (require SH approval and only cover 1 year)
50
How should audit fees be set?
personnel, time, risk, complexity and expenses
51
4 considerations before accepting appointment as auditor
1. Risk analysis - develop initial understanding of risk areas
2. Ethical barriers
3. Practical issues - what resources are available? Are they competent to complete the audit?
4. Legal issues - Whether the appointment and removal of the previously auditors was carried out in accordance with the Co. Act 2006
52
When can auditors be appointment by co. directors
to fill a casual vacancy or first appointment of auditors
53
How do members (shareholders) appoint auditors
passing an ordinary resolution at a general meeting (e.g >50%)
Appointment must be made within 28 days after the latest date for the filing of the financial statements (or existing auditor is deemed to be re-appointed)
Sec of state may have to appoint an auditor if no auditor has been appointed by the relevant time
54
What is the process by the Co. to remove the current auditor
Ordinary resolution passed at a gen meeting
55
What is the duty of the outgoing auditor (if the auditor is sacked )
Prepare and submit a statement of circumstances to the company's registered office (a statement of matters to be brought to the attention of shareholders or creditors, or a statement that there are no such circumstances)
**companies act states auditors of listed companies cannot state there are no circumstances
56
What is the process if an auditor wishes to resign from it's position as auditor?
Submit written notice to the company's registered office
Prepare and submit a statement of circumstances to the company's registered office
Rights of outgoing auditor: right to request, attend and speak at an extraordinary general meeting. This can be called at short notice (max of 4 weeks after it is called)
57
What should the AUDIT engagement letter set out in writing?
- Objective and scope of audit
- Management responsibilities
- Auditors responsibilities
- Form and content of reports and communications on the audit
- The auditors rights to acess records, documents and info required on the audit
- The expectation that management will provide a written representation
It may also cover other matters such as fees, practicalities and timetable of the audit
New engagement letter not needeed every year if no changes
58
What does the engagement letter help to mitigate
the expectation gap
59
What should other (non-audit) engagements cover?
Work to be carried out, and the form and content of any reports
60
What are the reasons to plan an audit
Helps auditor to:
- devote attention to important areas of the audit
- identify and resolve practical problems on a timely basis
- organise the audit to ensure it is performed in an effective d efficient way
- select staff with appropriate level of competence
- Direct, supervise and review audit work
- co-ordinate work done by auditors of components or experts
61
What are materiality by size thresholds?
5% profit before tax
0. 5 - 1% of gross profit
0. 5 - 1% of revenue
1 - 2% of total assets
2 - 5% net assets
5-10% profit after tax
62
What items are material by nature
- Matters relating to directors ore related party transactions
- small amount that impact critical points
- Descriptions (i.e accounting policies which are misleading)
63
When can analytical procedures be used?
MUST be used as part of risk assessment process
CAN be used as a form of substantive procedure
64
Limitations of analytical procedures
They require a sound knowledge/ experience of entity which may be limited in the first year
It's only a high level procedure
Depends on reliability of data source
Overview approach may 'hide' inconsistencies - requires division of data
65
How do you perform an analytical procedure?
Gain an understanding of the business
Develop an expectation
Compare the actual to the expectation
Unexpected variations are risks that require further attention on the audit
66
What is the purpose of understanding the entity and its environment?
- Risk assessment required by ISA's require an understanding of the client
- Assess the skills and competence the audit team needs
- Plan an efficient audit
- Assess the internal control system which enables an assessmemt of control risks
- Assess any significant risks that require special attention
- Perform analytical procedures
67
What type of information is required for understanding the entity and it's environment?
Nature of the industry
- Laws and regs
- The market
- Competition
- Technology
- Data protection regs
Nature of the business
- Ops
- Ownership and governance
- Investments
- Structure / finance
- Accounting policies
- Objectives and strategies
- System of internal control
- Use of outsourcing
68
Sources of Information : External sources
- credit ref agencies
- industry publications or surveys
- companies house searches
- industry regulators
69
Sources of information: Audit firm
- Previous year's audit working papers
- knowledge held by the partner / manager
- Tax working papers
- the firms industry specialist
70
Sources of information: The client
- Discussion
- Board minutes /. internal audit reports / websites
- Observing processes
- Analytic procedures
71
Define: Audit risk
AR = IR x CR x DR
The risk that the auditor expresses an inappropriate opinion on financial statements
72
Define: Inherent risk
how susceptible an assertion about a balance / transaction is to be materially incorrect
73
Define: Control risk
the risk a misstatement is not prevented, detected or corrected by the entities internal controls
74
Define: Detection risk
The risk that the procedures performed by the auditor does not reduce the audit risk to an acceptably low level to detect a misstatement that exists and could be material
75
What are indicators of significant risk according to ISA315?
- Fraud risk
- complexity
- related party transactions
- subjectivity
- Transactions outside the normal course of business
76
How should auditors approach / handle risk?
1. Emphasise to staff the need to maintain professional skepticism
2. Assign extra / more experienced staff
3. Use the work of experts, internal auditors or other auditors
4. Provide more supervision on the audit
5. Incorporate more unpredictability into audit procedures
***nature, extent and timing of audit procedures should be responsive to the assessed risks**
77
Since the auditor has sole responsibility for the work of others, what should they do if they wish to rely on the opinion of others?
1. assesss if the party they are relying on is competent and objective
2. specifically assess the work which has been performed/ sent, has it been properly planned and performed?? Are the conclusions appropriate?
OBJECTIVE / COMPETENCE / SYSTEMIC AND DISCIPLINED APPROACH USED?
3. Is the dataset used complete?
78
Describe financial statements review (completion)
1. Do the financial statements comply with companies act and accounting standards
* USE A CHECKLIST TO DETERMINE WHETHER THE DISCLOSURES HAVE BEEN PROPERLY PERFORMED*
2. Do the financial statements make sense?
* *USE ANALYTICAL PROCEDURES - INTERPRET FS USING ABSOLUTE FIGURES AND RATIOS, INVESTIGATE UNUSUAL MOVEMENTS, IF MORE ANSWERS ARE REQUIRED THEN MORE WORK SHOULD BE DONE***
79
What should auditors do once they accumulate a list of misstatements identified during the audit?
- Inform management
- Reassess materiality
- Determine whether uncorrected misstatements are material, individually or in aggregate
- Seek written management representations to confirm that the effect of uncorrected misstatements is immaterial
