Lecture 1

Question 1

What is an audit?

Answer 1

Independent third party investigating and examining a company’s financial records to form an opinion as to whether they are true and fair

Question 2

Features of audit engagement

Answer 2

Responsible party (Management/ Directors)
PREPARE
Subject matter (Company’s performance)
PRESENTED AS
Subject matter information (Financial Statements)
ISSUED TO
User (shareholders)

Question 3

Purpose of an audit

Answer 3

To reduce (not eliminate) risk

Question 4

Reasonable assurance =

Answer 4

Results in positive form of expression of opinion. No material misstatements. Year end audit opinion.

Question 5

Limited assurance =

Answer 5

Negative form of expression of opinion. We did not detect any material misstatements. Half year end audit opinion.

Question 6

Objective of an audit

Answer 6

Enables auditor to express opinion on whether FSs prepared in all material aspects in accordance with the applicable financial reporting framework.

Question 7

Who needs audit?

Answer 7

Companies Act determines. All companies (including subs) unless small/ dormant

Question 8

Small company after 1/1/16 (2 of 3 criteria for 2 consecutive years)

Answer 8

Turnover =

Question 9

Small company before 1/1/16 (2 of 3 criteria for 2 consecutive years)

Answer 9

Turnover =

Question 10

Inverted L test

Answer 10

Yr 1 Yr 2
Current size M S
Status for year M M

Question 11

New audit exemption rules for subsids YE after

Answer 11

1/10/2012

Question 12

New audit exemption rules for subsids (6)

Answer 12

Subsids don’t need audit report if parent agrees to guarantee liabilities and meets criteria:

• Parent established under law EEA state
• Shareholders’ unanimous agreement
• Subsid included consolidated accounts parent
• Disclose in notes accounts
• File docs at Companies House
• Company not quoted

Question 13

Public company appointing auditor

Answer 13

Appointed by shareholders at AGM/ accounts meeting. Must be appointed/ reappointed each year.

Question 14

If directors/ shareholders fail to appoint auditor in public company

Answer 14

Secretary of state has power to

Question 15

Directors can only appoint auditors (3)

Answer 15

• To fill casual vacancy
• In company’s first period for appointing auditors
• Following period when company was audit exempt

Question 16

Private company appointing auditor

Answer 16

Same as public, although AGM unlikely therefore appointed/ reappointed within 28 days of copy of prior year accounts being sent to shareholders

Question 17

New audit report format

Answer 17

ISA 701 for periods ending on/ after 15th December 2016.

Question 18

Expectation gap =

Answer 18

Gap between expectations of users of financial statements and audit firm’s legal responsibilities

Question 19

Narrowing expectation gap: (4)

Answer 19

• Audit reports include link to FRS website detailing scope of audit
• All FSs include Director’s responsibility statement
• Engagement letter includes Director’s responsibility statement
• Recommendation for audit committees to be established

Question 20

External regulators (2)

Answer 20

• FRC (Financial Reporting Council)

- Accountancy Bodies (ICAEW, ICAS, ACCA)

Question 21

FRC roles (2)

Answer 21

• Sets standards and rules

- Polices application of standards

Question 22

4 stages to an audit

Answer 22

1) Planning and design approach
2) Controls testing
3) Substantive testing
4) Completion

Question 23

Plan and design approach (5)

Answer 23

• Client acceptance, independence checks and issue engagement letter
• Understanding client’s business and industry
• Assess business risk, signif risk and inherent risk
• Planning analytics/ materiality
• Understanding entity and process level control environment

Question 24

Controls testing

Answer 24

Perform tests of process level and entity level controls (if relying on)

Question 25

Substantive testing (3)

Answer 25

• Perform ToD and SAPs
• Perform additional procedures if testing didn’t provide sufficient comfort
• Perform testing on going concern

Question 26

Completion (5)

Answer 26

• Perform tests for financial statement disclosures
• Issue audit report
• Communicate findings to management and audit committee
• Accumulate final evidence
• Complete assembly of audit file