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Audit and Assurance > Kaplan Summary Notes > Flashcards

Kaplan Summary Notes Flashcards

1
Q

Two types of assurance engagements

A

Reasonable or Limited engagements

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2
Q

Reasonable assurance engagements give what assurance level and conclusion?

A

High assurance level

Positive opinion / conclusion

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3
Q

Limited assurance engagements give what assurance level and conclusion?

A

Moderate assurance level

Negative opinion / conclusion

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4
Q

3 objectives of an audit (ISA 200) ?

A
  1. Obtain reasonable assurance the FS are free from material misstatement and properly prepared in accordance with an applicable financial reporting framework
  2. Report on FS
  3. Communicate with those charged with governance
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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:

  1. No more than 50 employees
  2. Turnover does not exceed £10.2 million
  3. Gross assets total does not exceed £5.1 million
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6
Q

When will subsids not require an audit

A

Subsids will not require an audit if the parent can guarantee their liabilities.

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7
Q

Which companies must have an audit even if they meet the rules for not having one

A
  1. Plcs
  2. Insurance companies and banks
  3. Where shareholders owning at least 10% of the shares ask for an audit
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8
Q

Name 4 benefits of an audit

A
  1. Independent scrutiny of the business by experts
  2. Additional assurance may be necessary for 3rd parties (i.e banks)
  3. A growing audit will need an audit one day
  4. Subsidiary benefits of the audit (e.g reports to management)
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9
Q

Who do statutory audits report to?

A

Shareholders

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10
Q

Who do other (non-stat audits) assurance engagements report to?

A

Usually management

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11
Q

What determines the scope of a statutory audit?

A
  1. Companies house act 2006
  2. ISAs
  3. Other audit regulations
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12
Q

What determines the scope of other (non-stat audit) engagements ?

A
  1. Terms of the engagement

2. Relevant ISAEs or ISREs

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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
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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.

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15
Q

State two main management responsibilities (and give examples)

A
  1. Managing the Business
    - to achieve objectives
    - to asses business risks
  2. 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
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16
Q

Define auditor’s reponsibilities

A
  1. To form an opinion on the financial statements
    - true and fair
    - properly prepared
    - directors report consistent with the FS.
  2. Identify any material misstatements whether caused by error, fraud or non-compliance. (Fraud risk should be communicated during internal planning meeting)
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17
Q

List 5 fraud procedures

A
  1. Perform a fraud risk assessment
  2. Exercise professional scepticism
  3. Discuss fraud among the engagement team
    respond appropriately to the assessed level of fraud risk
  4. Respond appropriately to the asseed level of risk
  5. 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.
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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

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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

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20
Q

ISA 240 - When should suspected fraud be reported to third parties?

A

Only when there is a duty to disclose

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21
Q

ISA 250 - Define non-compliance assurance procedures

A
  1. Perform risk assessment
  2. Obtain evidence about compliance
  3. If non-compliance is suspected, document and discuss with management
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22
Q

Where must any suspicions of bribery be reported?

A

National crime agency under the proceeds of crime act 2002

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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
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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
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25
Q

What are the main implications of the Sarbanes-Oxley Act FOR THE AUDITOR?

A
  • Stricter enforcement of auditor independence rules
  • Public company accounting oversight board can inspect audit files of US listed companies, including subsidiaries based overseas
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26
Q

What are auditors responsibilities for related party transactions?

(ISA 550)

A
  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

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27
Q

What are auditors responsibilities in relation to money laundering?

A
  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

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28
Q

What assurance engagement standards are applicable across ALL assurance engagements? (4)

A
  1. Ethical standards
  2. Risk assessment
  3. Terms of engagements
  4. ISQC’s
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29
Q

What additional regulations do audit engagements need to follow?

A

Companies Act 2006

ISAs

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30
Q

IAASB

A

Subsid of IFAC

Develops international standards, issuning ISAs, ISQCs and other standards

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31
Q

Role of FRC

A

Supervises UK acountancy issues

Issues (UK) ISA’s

Issues guidance on ethical standards, practice notes and bullteins etc.

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32
Q

Current audit issues

A
  • Harmonisation
  • Professional skeptism
  • Newer considerations - big data, future of audit, joint audits, climate change and technological advancements
33
Q

Fundamental ICAEW ethical principles

A

integrity

objectivity

Professional competence and due care

Confidentiality

Professional behaviour

34
Q

Threats to objectivity and independence

A

Self-interest threat

Self review threat

Advocacy threat

Familiarity threat

Intimidation threat

Management threats

PROFESSIONAL SKILL: APPLYING JUDGEMENT TO ETHICAL THREATS

35
Q

Define PIE entities

A

Public interest companies

36
Q

What non-audit services are PIE audit clients allowed to use?

A

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
Q

What non-audit services can be offered to non-PIE audit clients?

A

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
Q

Name 3 provisions available for audits of small entities

A
  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
Q

Define an accountants duty of confidentiality

A

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
Q

When would an accountant have a duty to disclose?

A

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
Q

When would an accountant have a right to disclose?

A

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
Q

If a conflict of situation arises, then what should the audit firm do?

A
  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
Q

Benefits and issues with social media

A

Benefits:

  • sharing experiences
  • creating engagement in debate
  • raising awareness / profiles

Issues:

  • Confidentiality breaches
  • Critisism
  • lack of integrity / professional behaviour
  • offensive posts
  • illegal acts
44
Q

Define consequences of poor quality control

A

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
Q

What are the components of a system of QC in a firm?

A
  • Leadership responsibility for quality within the firm
  • ethical requirements
  • acceptance and continuance of client relationships and specific engagements
    HR
  • Engagement performance
  • Monitoring
  • Documentation
46
Q

Define ‘EQCR’

A

‘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
Q

Define ‘cold review’

A

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
Q

What are audit committees of listed companies required to do as part of the UK Corporate Governance Code

A

Review and monitor the independence, objectivity and effectiveness of the external auditor.

49
Q

How can audit firms limit liability

A
  1. Professional indemnity insurance
  2. LLP’s
  3. Liability caps (require SH approval and only cover 1 year)
50
Q

How should audit fees be set?

A

personnel, time, risk, complexity and expenses

51
Q

4 considerations before accepting appointment as auditor

A
  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
Q

When can auditors be appointment by co. directors

A

to fill a casual vacancy or first appointment of auditors

53
Q

How do members (shareholders) appoint auditors

A

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
Q

What is the process by the Co. to remove the current auditor

A

Ordinary resolution passed at a gen meeting

55
Q

What is the duty of the outgoing auditor (if the auditor is sacked )

A

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
Q

What is the process if an auditor wishes to resign from it’s position as auditor?

A

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
Q

What should the AUDIT engagement letter set out in writing?

A
  • 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
Q

What does the engagement letter help to mitigate

A

the expectation gap

59
Q

What should other (non-audit) engagements cover?

A

Work to be carried out, and the form and content of any reports

60
Q

What are the reasons to plan an audit

A

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
Q

What are materiality by size thresholds?

A

5% profit before tax

  1. 5 - 1% of gross profit
  2. 5 - 1% of revenue

1 - 2% of total assets

2 - 5% net assets

5-10% profit after tax

62
Q

What items are material by nature

A
  • Matters relating to directors ore related party transactions
  • small amount that impact critical points
  • Descriptions (i.e accounting policies which are misleading)
63
Q

When can analytical procedures be used?

A

MUST be used as part of risk assessment process

CAN be used as a form of substantive procedure

64
Q

Limitations of analytical procedures

A

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
Q

How do you perform an analytical procedure?

A

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
Q

What is the purpose of understanding the entity and its environment?

A
  • 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
Q

What type of information is required for understanding the entity and it’s environment?

A

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
Q

Sources of Information : External sources

A
  • credit ref agencies
  • industry publications or surveys
  • companies house searches
  • industry regulators
69
Q

Sources of information: Audit firm

A
  • Previous year’s audit working papers
  • knowledge held by the partner / manager
  • Tax working papers
  • the firms industry specialist
70
Q

Sources of information: The client

A
  • Discussion
  • Board minutes /. internal audit reports / websites
  • Observing processes
  • Analytic procedures
71
Q

Define: Audit risk

A

AR = IR x CR x DR

The risk that the auditor expresses an inappropriate opinion on financial statements

72
Q

Define: Inherent risk

A

how susceptible an assertion about a balance / transaction is to be materially incorrect

73
Q

Define: Control risk

A

the risk a misstatement is not prevented, detected or corrected by the entities internal controls

74
Q

Define: Detection risk

A

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
Q

What are indicators of significant risk according to ISA315?

A
  • Fraud risk
  • complexity
  • related party transactions
  • subjectivity
  • Transactions outside the normal course of business
76
Q

How should auditors approach / handle risk?

A
  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
Q

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?

A
  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?

  1. Is the dataset used complete?
78
Q

Describe financial statements review (completion)

A
  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
Q

What should auditors do once they accumulate a list of misstatements identified during the audit?

A
  • 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

Audit and Assurance (1 decks)

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