Lecture 8

Question 1

Fraud ISA 240 states

Answer 1

Intentional act by management, employees or other involving use of deception to obtain unjust/ illegal advantage

Question 2

Two types of fraud:

Answer 2

• Fraudulent financial reporting

- Misappropriation of assets

Question 3

Fraudulent financial reporting (2)

Answer 3

• Usually perpetrated by management

- Manipulation, falsification, omission or alteration of accounting records/ documents

Question 4

Misappropriation of assets (3)

Answer 4

• Generally by employees
• Stealing assets/ using for personal use
• Embezzling payments/ paying for goods/ services not received

Question 5

Auditor responsibilities for fraud

Answer 5

To detect material misstatements as a result of fraud or error

Question 6

Auditors are not expected to detect fraud where

Answer 6

Collusion occurs

Question 7

Fraud > journals testing

Answer 7

ISA 240 mandates because fraud is usually perpetrated through the use of inappropriate/ unauthorised journal entries. Look for abnormal journals

Question 8

Estimates =

Answer 8

Provisions/ accruals/ depreciation

Question 9

Estimates > auditors should (3)

Answer 9

• Consider if estimates made suggest management bias
• Perform retrospective review
• Consider if bias identified indicates fraud

Question 10

Going concern =

Answer 10

Accounting statements should be prepared as if business will continue for foreseeable future (12 months after accounts signed)

Question 11

Long term assets assumed to be used for

Answer 11

Useful economic life

Question 12

Break up basis > assets held at

Answer 12

Value expected to be sold at

Question 13

ISA 570 states auditors must consider (3)

Answer 13

• If management have appropriately used GC assumption
• If GC basis is adequately disclosed
• If events/ conditions cast doubt on entity’s ability to operate as a GC

Question 14

Indicators GC not appropriate (6)

Answer 14

• Net/ current liabilities
• Discontinuation dividends
• Debt restructuring
• Changes to market
• Cash flow problems
• Changes to government legislation

Question 15

Audit tests for GC (3)

Answer 15

• Obtain cash flow forecasts and test assumptions
• Consider the sensitivity of budgets and cash flows to variable factors
• Understand existing facilities and covenants etc

Question 16

Clean Opinion (2)

Answer 16

Going concern appropriate and basis for management assessment is disclosed OR going concern inappropriate and accounts are prepared on the break up basis

Question 17

Clean Opinion with emphasis of matter

Answer 17

GC appropriate but material uncertainty in relation to GC exists, but adequately disclosed by management

Question 18

Qualified/ adverse opinion

Answer 18

GC appropriate but material uncertainty in relation to GC exists, and not adequately disclosed by management

Question 19

Adverse opinion

Answer 19

GC inappropriate and accounts prepared on GC basis

Question 20

Subsidiary failing GC test

Answer 20

Auditors can still sign set accounts on GC basis if parent company prepared to sign letter of group support

Question 21

Specific topics (3)

Answer 21

• Litigation and claims
• Laws and regulation breaches (ISA 250)
• Related party transactions (ISA 550)

Question 22

Litigation and claims > auditors must be aware

Answer 22

Of litigation and claims that may impact financial statements

Question 23

Laws and regulation > auditors must

Answer 23

Have consideration for laws and regulations in audit of FSs

Question 24

Indications of law and regulation breaches (4)

Answer 24

• Government investigation
• Transactions without backing/ unsual
• Fines/ penalties
• Purchases at unusually high/ low prices

Question 25

Related party transactions =

Answer 25

Transactions with people or companies related to the entity being audited.

Question 26

Auditor responsibility for RPT

Answer 26

Ensure RPT are indentified and disclosed in FSs.