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y1 : audit & assurance > lazy unincluded stuff > Flashcards

lazy unincluded stuff Flashcards

1
Q

what is reasonable assurance?

A

used in statutory audit, whereby reduces assurance engagement risk to an acceptably low level. form of expression is positive.

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2
Q

give an example of reasonable assurance.

A

“the accounts are true and fair”

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3
Q

what is limited assurance?

A

higher acceptable engagement risk. form of expression is negative.

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4
Q

give an example of limited assurance.

A

“nothing has come to our attention”

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5
Q

what is the expectation gap?

A

(Humphreys and Turley, 1992)
gap exists when auditors and public hold different beliefs about auditors duties ans responsibilities and the messages conveyed by audit reports

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6
Q

give 6 things that auditors are responsible for.

A
  • fraud
  • preparation
  • true & fair view
  • compliance
  • going concern
  • ethical stance
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7
Q

what are some elements to consider when planning an audit?

A
  • size of entity
  • complexity of audit
  • auditors experience of entity
  • knowledge of business
  • commercial environment
  • methods of processing transactions
  • reporting requirements
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8
Q

how can auditors respond to a high level of audit risk?

A
  • increase sample size & range of techniques used
  • commit to longer audit to ensure auditor captures sufficient evidence
  • consider use of an expert
  • appoint an audit team that is more experienced
  • consider asking colleague to review the audit
  • reduce materiality
  • increase professional skepticism
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9
Q

what are the typical materiality thresholds that are used?

A
  • 5% to 10% profit before tax
  • 0.5% to 2% of total assets
  • 0.5% to 2% of total revenue
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10
Q

what does audit evidence include?

A
  • controls testing (testing systems and processes)
  • substantive testing (testing numbers in financial statements)
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11
Q

what is debtors circularisation?

A

asking customers to confirm their balance to the auditors. checks if debtors figure on FRs are correct - could be overstated as debtors are assets

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12
Q

what is a letters of management representations?

A

letter to auditor from senior mgt. states all info is accurate and has been disclosed. may have specific representation for matters of judgement where strong audit evidence is difficult to obtain eg. provisions.

acts as comfort blanket for auditor

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13
Q

when is a “yes - disclaimer ‘cannot obtain evidence’” decision used?

A

if auditor is unsure if there is a material error and it is pervasive (done to completely mislead users)

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14
Q

when is a “no - qualified opinion ‘except for’” decision used?

A

if auditor doesn’t know if there has been a material error and it is not pervasive.

if auditor knows there is a material error and it is not pervasive.

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15
Q

when is a “yes - adverse opinion ‘do not’” decision used?

A

if auditor knows there is a material error and it is pervasive

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16
Q

when is a “unqualified or clean opinion” decision used?

A

if auditor finds no material errors

17
Q

what are the limitations of assurance?

A
  • testing is used, samples are selected
  • difficulty in detecting fraud
  • human error from client or auditor
18
Q

what are the directors responsibilities?

A
  • preparing accounts in accordance with applicable laws
  • select suitable accounting policies
  • make judgements which are reasonable & prudent
  • assess going concern status
  • keeping adequate accounting records
  • safeguard assets
  • prevent & detect fraud
19
Q

what is the brydon report?

A

report commissioned in response to perceived widening of audit expectations gap.

20
Q

what does the brydon report explore?

A
  1. purpose of audit & who it should be carried out for
  2. whether scope & purpose should be widened & strengthened to meet expectations of audit
  3. how quality of audit process could be improved
  4. whether audit findings could be better communicated
  5. role of audit within wider business assurance & directors legal responsibilities
  6. role of audit in detecting fraud
  7. auditor liability
21
Q

what is the difference between the objectives for external and internal audit?

A

external audit :
- to form an opinion on the accounts

internal audit :
- to fulfill obligations of the audit committee

22
Q

what is the difference between the standards for external and internal audit?

A

external audit :
- must follow ISAs

internal audit :
- can follow IIA

23
Q

what is the difference between the reporting for external and internal audit?

A

external audit :
- report to shareholders

internal audit :
- report to audit committee

24
Q

what is the difference between the status for external and internal audit?

A

external audit :
- independent

internal audit :
- independent, although often employee

25
Q

what is the difference between the qualifications for external and internal audit?

A

external audit :
- qualified accountant and member of regulated supervisory body

internal audit :
- none required, just preferable

26
Q

give 5 advantages of outsourcing internal audit.

A
  • team will be specialists in internal audit & able to share best practice
  • will be independent
  • may hold more weight
  • should be cheaper (wage v salary)
  • quick set up time
27
Q

give 4 disadvantages of outsourcing internal audit.

A
  • outsourced IA may not have detailed knowledge of company
  • possible self review threat if external auditors used
  • may lose control over when work is done
  • may lose skills & training opportunities for staff
28
Q

what are the two types of information processing controls?

A
  • general controls
  • application controls
29
Q

give an example of a general information processing control.

A

supports overall function. eg. cloud back ups, prevention of unauthorised access

30
Q

give an example of an application information processing control.

A

related to one specific area. eg. controls over inputs - completeness or accuracy

31
Q

give an example of controls testing process.

A
  1. every month bank clerk reconciles cash book to bank statements. signed off by finance director as evidence of review (paRiS)
  2. ensures cash balance is Accurate and can be reconciled to cash in book (cAvecop)
  3. Inspect sample of bank reconciliations to ensure been appropriately authorised (eIou)
32
Q

give an example of controls recommendation process.

A
  1. bank balance not reconciled to bank statement
  2. cash balance in book could be materially different to balance in bank. or cash could be stolen & company unaware
  3. should Reconcile cash book to bank statements every month. then should be signed off by finance director as evidence of review
33
Q

what is a receivables ledger?

A

list of all amounts due from customers which needs to be reconciled to trial balance to verify that receivables havent been overstated (existence)

34
Q

what is the active duty of an auditor?

A

auditors responsibility to gather evidence to support opinion. actively seek material misstatements

35
Q

what is the passive duty of an auditor?

A

auditor is obliged to investigate possible misstatements if they are explicitly asked to do so by a stakeholder

36
Q

what is an example of when you must adjust a subsequent event?

A
  • bad debt
  • stock writedown
37
Q

what is an example of when you must disclose a subsequent event?

A
  • fire
  • flood
38
Q

what happens if the business is not on a going concern basis?

A
  • fixed assets must be reclasssified as current assets and valued at lower of cost & NRV
  • long term liabilities reclassified as current liabilities
  • costs of winding up must be recognised
39
Q

what does “presented fairly” mean?

A
  • factual - no material misstatements
  • free from bias
  • objective
  • accordance with expectations of users
  • reflect commercial substance of business’s transactions

y1 : audit & assurance (11 decks)

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