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AA Question Rote > Minor Areas Section B Rote (Audit Risk) > Flashcards

Minor Areas Section B Rote (Audit Risk) Flashcards

1
Q

If CEO is also chairman of the board (corporate governance risk)

A

Unfethered power in decision making -> should resign as chair and independent non-executive should be appointed

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2
Q

Only queries being raised at a company’s annual general meeting (corporate governance risk)

A

Doesn’t offer regular effective engagement with owners -> should take steps to encourage more effective engagement (e.g. form regular meetings)

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3
Q

Non-exec renumeration based on pre-tax profit targets (corporate governance risk)

A

Pay should not be based on how company performs as lacks independence -> annual fee based on responsibility

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4
Q

Company doesn’t have audit committee (corporate governance risk)

A

No independent relationship with external committee -> appoint audit committee with 3 non-executive directors and one non-executive director with financial expertise

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5
Q

Use of prior year audited financial statements (planning stage of audit) (insight trends performance)

A

Gain insight into trends in performance, accounting policies and company size

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6
Q

Current year budgets and managemenht accounts (planning stage of audit) (relevant info analytical)

A

Provides relevant financial info for the year to date. Preliminary analytical procedures

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7
Q

Prior year report to management (planning stage of audit) (internal control deficiencies)

A

Gain information on system of internal control and any identified control deficiencies

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8
Q

Board meeting minutes (planning stage of audit) (knowledge business directors)

A

Gain knowledge about important issues affecting the business which directors discussed

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9
Q

What is the audit engagement partner required to take responsibility for (ISA 220) (supervision performed)

A

Overall supervision of audit and reviews performed

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10
Q

Supervision ISA 220 (auditor progress engagement)

A

Auditor should keep track of progress of audit engagement (e.g. monitoring progress against audit plan)

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11
Q

Supervision ISA 220 (competence members training)

A

Competence of individual members of the audit team - whether on=the-job training is necessary

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12
Q

Supervision ISA 220 (supervisied auditor matter experienced engagement partner)

A

Supervising auditor is responsible for identify matters for consideration by more experienced engagement team members (e.g. audit engagement partner)

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13
Q

Review ISA 220 (work completed accordance ISA)

A

Auditor required to review work completed by team and consider whether work is acordance with ISA

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14
Q

Review ISA 220 (significant matters attention consoltation)

A

Whether significant matters raised for audit engagement partner attention and where appropriate consoltation has taken place

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15
Q

Review ISA 220 (revise nature objectives)

A

Revise nature, timing and extent of work performed. How nature of objectives have been achieved

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16
Q

Audit engagement letter ISA 210 (purpose)

A

Nature of contract between audit firm and audit client. Reduces misunderstanding between auditor and client

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17
Q

Audit engagement letter properties ISA 210 (scope)

A

Overall scope of audit

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18
Q

Audit engagement letter properties ISA 210 (a respon)

A

Auditor’s responsibilities

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19
Q

Audit engagement letter properties ISA 210 (m respon)

A

Management’s responsibilities

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20
Q

Audit engagement letter properties ISA 210 (MM)

A

Fact that material misstatements may not have been detected

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21
Q

Audit engagement letter properties ISA 210 (expectation management info FSs)

A

Expectation that management will provide access to all information relevant to financial statements

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22
Q

Preconditions for an audit ISA 210 (financial reporting)

A

Determine whether IFRS are applied in preparation of financial statements is acceptable

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23
Q

Preconditions for an audit ISA 210 (obtain preparation FS)

A

Obtain agreement from management that they understand their responisibility to prepare FSs in accorance with financial reporting framework

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24
Q

Preconditions for an audit ISA 210 (obtain design internal controls FSs)

A

Obtain agreement from management that they understand their responisibility for design and implementation of internal controls which enable company to prepare FSs

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25
Q

Preconditions for an audit ISA 210 (obtain access records)

A

Obtain agreement from management that they understand their responisibility with access to all records relevant to financial statements

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26
Q

Prevention and detection of fraud and error (ISA 240 obtain reasonable MM)

A

Conduct audit using ISA 240 and obtain reasonable assurance that FSs are free from material misstatement

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27
Q

Prevention and detection of fraud and error (report parties)

A

Must report fraud to appropriate parties

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28
Q

Prevention and detection of fraud and error (obtain evidence responses)

A

Obtain appropriate evidence regarding assessed risks of MM due to fraud, through implementing appropriate responses

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29
Q

Prevention and detection of fraud and error (engagement team fraud)

A

Whole engagement team is aware of risks and responsibilities for fraud and error

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30
Q

Type of threat when managing director suggests all audit staff go to luxury hotel?

A

Self-interest and familiarity threat -> less likely for audit staff to challenge assumptions

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31
Q

Appropriate safeguard for when managing director suggests all audit staff go to luxury hotel?

A

Offer should be decilined

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32
Q

Type of threat when audit fee is renegotiated as percentage of company’s net profit?

A

Self-interest threat -> audit team may feel incentivised to allow incorrect accounting treatements to maximise profit

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33
Q

Appropriate safeguard when audit fee is renegotiated as percentage of company’s net profit?

A

Auditor should not agree to such fees and that audit fee needs to reflect level of work and experience of the team

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34
Q

Type of threat when approached by related company to assist with acquisiton target?

A

Advocacy threat -> Potentially promotoing another company as an investor

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35
Q

Appropriate safeguard when approached by related company to assist with acquisiton target?

A

Auditor must ensure they don;t make management decisions. Include reviewer not involved in providing the audit service

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36
Q

What is professional scepticism?

A

A questioning mind that’s alert to conditions which may indicate possible misstatement due to fraud or error

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37
Q

Professional scepticism to increasing receivables collection period and management doesn’t want to increase allowance?

A

Whether management’s assessment of recoverabiltiy is reasonable, as any increase in allowance reduces profit

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38
Q

Professional scepticism for reliance on bank overdraft?

A

Management may want to overstate profit and understate liabilities so bank overdraft renews

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39
Q

Professional scepticism for revenue recognition?

A

Look at a company’s revenue policy to decude whether judgement may be involved as a way to manipulate revenue

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40
Q

Audit planning benefits (resolve problems timely)

A

Helps auditor to identify and resolve potential problems on a timely basis

41
Q

Audit planning benefits (auditor engagement performed manner)

A

Helping auditor to properly manage audit engagement so performed in an effective manner

42
Q

Audit planning benefits (assisting work experts)

A

Assisting in coordination of work done by expoerts

43
Q

Audit planning benefits (facilitating supervision engagement)

A

Facilitating the direction and supervision of engagement team members and review their work

44
Q

Safeguard to ensure information is kept confidential (advising independent)

A

Should advise one or both clients to seek additional independent advice

45
Q

Safeguard to ensure information is kept confidential (adequate procedures prevent access)

A

Adequate procedure should be in place within firm to prevent access to information

46
Q

Safeguard to ensure information is kept confidential (confidential agreements)

A

Should consider using confidental agreements signed by all members of the engagement team

47
Q

Safeguard to ensure information is kept confidential (reviewer)

A

Work performed should be reviewed by appropriate reviewer who is not involved in audit

48
Q

Audit engagement letter ISA benefits (confirm acceptance)

A

Confirm acceptance of the engagement

49
Q

Audit engagement letter ISA benefits (basis contract)

A

Forms basis of contract outlining terms and conditions of the engagement

50
Q

Prior to accepting new audit client (contact obtaining permission relevant)

A

Contact previous auditor, after obtaining permission ask for all info relevant to decision

51
Q

Prior to accepting new audit client (management integrity)

A

If management lack integrity, there is increased risk of fraud and intimidation

52
Q

Prior to accepting new audit client (financial reporting and internal controls)

A

Management will use an acceptable financial reporting framework and use internal controls that are free from material misstatement

53
Q

Prior to accepting new audit client (independence)

A

Threats to independence that can’t mitigated (e.g. staff at one company related to staff employed at another company)

54
Q

Prior to accepting new audit client (resources available)

A

All staff must have the resources of carrying out audit in accordance with ISAs

55
Q

What is materiality ISA 320? (economic)

A

Misstatements are considered material if they influence economic decisions taken by users of FSs

56
Q

What determines material misstatement?

A

Size or nature. Nature could mean a directors’ transactions

57
Q

What must auditor consider in assessing performance materiality?

A

Auditor must consider number of errors each with a low value may aggregate amount to a material misstatement

58
Q

What is meant by performance materiality?

A

Amount set by auditor that is less than overall materiality level. Ensures undetected misstatements don;t exceed overal materiality of FSs

59
Q

What is performance materiality used for?

A

Testing individual transactions with aim to reduce risk that total of errors exceed overall materiality

60
Q

How are analytical procedures used during the planning stage?

A

Must be used as risk assessment procedures to help auditor to obtain an understanding of entity and assess ROMM

61
Q

How are analytical procedures used during the final audit?

A

Used to obtain sufficient appropriate evidence. Can either be tests of detail or substantive procedures

62
Q

How are analytical procedures used during the review stage?

A

Auditor must design and perform analytical procedures to assist them with forming overall conclusion with the planning stage of the audit

63
Q

Prevention and detection of fraud and error (assurance scepticism management override)

A

When obtaining reasonable assurancem auditor is responsible or maintaining scepticism through the audit, considering potential for management override of controls

64
Q

Audit senior instrcuted to take on roles of audit senior and audit manager (Qaulity management deficiency and recommendation)

A

Insufficient time to fulfil responsibility, increasing risk of ISA non-copliance -> arrange extension of deadline OR assign someone else with experience

65
Q

Work not expected to be reviewed each stage (Qaulity management deficiency and recommendation)

A

No time for additional work due to lack of time, evidence is not obtained to draw conclusions from auditor’s report => work must be reviewed on a timely basis

66
Q

Audit engagement partner instructed audit senior to reduce sample sizes and procedures (Qaulity management deficiency and recommendation)

A

Reduced sample size means reasonable conclusions can’t support auditor’s report => ensure changes are only amde when it is appropriate to do so

67
Q

What does the audit strategy document determine?

A

Scope, timing and direction of audit and development of audit plan

68
Q

Main characteristics of an audit engagement in audit strategy?

A

Automated techniques used

Whether financial information audited with relevant financial reporting framework

Availability of key personnel

69
Q

Main characteristics of reporting objectives in audit strategy?

A

Audit timetable for reporting

Discussions with management

Timing of audit meetings

70
Q

Significant factors affecting the audit in audit strategy?

A

Determination of materiality for audit

Need to maintain a questioning mind

71
Q

Finance director keen to report financial results earlier than normal (ethical threat and safeguard)

A

Create an intimidation threat - feel under pressure to cut corners affecting obhectivity => either tell FD it’ll start earlier or in accordance with relevant ISAs

72
Q

Engagement quality reviewer was until last year audit engagement partner (ethical threat and safeguard)

A

Familiarity threat as long time association affects objectivity => in a listed company, previous audit engagement partner should not be involved in audit for at least 5 years

73
Q

20% of last year’s audit fees still outstanding and long time due for payment (ethical threat and safeguard)

A

Self-interest threat as management may be pressured to adopt accounting adjustments => discuss reasons why fee hasn’t been paid and auditor’s report not issued until fee is paid

74
Q

Prior to accepting an audit ISA 220 (new processes perform engagement)

A

Accepting new audit client. It sets out number of processes which auditor should perform prior to an engagement

75
Q

Prior to accepting an audit ISA 220 (local regulation)

A

Ensure the new engagement complies with ACCA Code of Ethics and local legislation

76
Q

Prior to accepting an audit ISA 220 (competent)

A

Whether firm is competent to perform audit and adequate resources are available

77
Q

Prior to accepting an audit ISA 220 (communication outgoing ethical reasons)

A

Should have communicated with outgoing auditor to assess any ethical or professional reasons appointment can’t be accepted

78
Q

Prior to accepting an audit ISA 220 (risk)

A

Consider level of risk attached to audit and whether it was acceptable for a firm

79
Q

Conflict of interest safeguard (independent advice)

A

Seek additional independent advice

80
Q

Conflict of interest safeguard (procedures safeguard)

A

Implement procedures to prevent access to information

81
Q

Conflict of interest safeguard (confidentiality agrement)

A

Confidentiality agrements signed by employees

82
Q

What is audit risk?

A

Risk auditor expresses an inappropriate audit opinion when FSs materially misstated

83
Q

When should audit engagement letter be revised? (entity misunderstands)

A

Indication entity muisunderstands the objective and scope of audit

84
Q

When should audit engagement letter be revised? (change in size)

A

Change in size of entiy’s business

85
Q

When should audit engagement letter be revised? (special terms)

A

Any revised or special terms of audit engagement

86
Q

When should audit engagement letter be revised? (contract out-of-date)

A

Changes in legal or regulatory requirements. Then contract is out-of-date

87
Q

When should audit engagement letter be revised? (change in frameowkr)

A

If changes in financial reporting framework, the audit engagement letter needs to be revised

88
Q

Gain understanding of audit (review board minutes)

A

Overview of key issues over the years

89
Q

Gain understanding of audit (accounting systems notes)

A

Provides informaiton on how key accounting systems operate

90
Q

Gain understanding of audit (current year budget)

A

Provides relevant information for year to date

91
Q

Gain understanding of audit (prior year FSs)

A

Provide information about size of company and accounting policies

92
Q

Quality management procedures ISA 220 (engagement quality someone independent)

A

Engagement quality review necessaary for listed clients. Should be someone independent of audit team

93
Q

Quality management ISA 220 procedures (audit work documentation work performed standards)

A

Audit work must be documented to provide evidence work performed in accordance with professional standards. Docuemntation proves audit has high quality

94
Q

Quality management ISA 220 procedures (consultation)

A

Consultation will be required where the team does not have necessary expertise

95
Q

What is a review engagement?

A

An alternative audit where practicioner reviews financial data

96
Q

What does practicioner do in a review engagement? (Financial data framework)

A

Whether anything comes to attention which means financial data not in accordance with framework

97
Q

How does review engagement differ from external audit?

A

Procedures are not as extensive as an external audit

98
Q

Only two director’s are subject to re-election (corporate governance risk)

A

Shareholders should review on a regular basis that composition of board of directors is appropriate => All directors subject to annual re-election by shareholders

AA Question Rote (30 decks)

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