Minor Areas Section B Rote (Audit Risk) Flashcards
If CEO is also chairman of the board (corporate governance risk)
Unfethered power in decision making -> should resign as chair and independent non-executive should be appointed
Only queries being raised at a company’s annual general meeting (corporate governance risk)
Doesn’t offer regular effective engagement with owners -> should take steps to encourage more effective engagement (e.g. form regular meetings)
Non-exec renumeration based on pre-tax profit targets (corporate governance risk)
Pay should not be based on how company performs as lacks independence -> annual fee based on responsibility
Company doesn’t have audit committee (corporate governance risk)
No independent relationship with external committee -> appoint audit committee with 3 non-executive directors and one non-executive director with financial expertise
Use of prior year audited financial statements (planning stage of audit) (insight trends performance)
Gain insight into trends in performance, accounting policies and company size
Current year budgets and managemenht accounts (planning stage of audit) (relevant info analytical)
Provides relevant financial info for the year to date. Preliminary analytical procedures
Prior year report to management (planning stage of audit) (internal control deficiencies)
Gain information on system of internal control and any identified control deficiencies
Board meeting minutes (planning stage of audit) (knowledge business directors)
Gain knowledge about important issues affecting the business which directors discussed
What is the audit engagement partner required to take responsibility for (ISA 220) (supervision performed)
Overall supervision of audit and reviews performed
Supervision ISA 220 (auditor progress engagement)
Auditor should keep track of progress of audit engagement (e.g. monitoring progress against audit plan)
Supervision ISA 220 (competence members training)
Competence of individual members of the audit team - whether on=the-job training is necessary
Supervision ISA 220 (supervisied auditor matter experienced engagement partner)
Supervising auditor is responsible for identify matters for consideration by more experienced engagement team members (e.g. audit engagement partner)
Review ISA 220 (work completed accordance ISA)
Auditor required to review work completed by team and consider whether work is acordance with ISA
Review ISA 220 (significant matters attention consoltation)
Whether significant matters raised for audit engagement partner attention and where appropriate consoltation has taken place
Review ISA 220 (revise nature objectives)
Revise nature, timing and extent of work performed. How nature of objectives have been achieved
Audit engagement letter ISA 210 (purpose)
Nature of contract between audit firm and audit client. Reduces misunderstanding between auditor and client
Audit engagement letter properties ISA 210 (scope)
Overall scope of audit
Audit engagement letter properties ISA 210 (a respon)
Auditor’s responsibilities
Audit engagement letter properties ISA 210 (m respon)
Management’s responsibilities
Audit engagement letter properties ISA 210 (MM)
Fact that material misstatements may not have been detected
Audit engagement letter properties ISA 210 (expectation management info FSs)
Expectation that management will provide access to all information relevant to financial statements
Preconditions for an audit ISA 210 (financial reporting)
Determine whether IFRS are applied in preparation of financial statements is acceptable
Preconditions for an audit ISA 210 (obtain preparation FS)
Obtain agreement from management that they understand their responisibility to prepare FSs in accorance with financial reporting framework
Preconditions for an audit ISA 210 (obtain design internal controls FSs)
Obtain agreement from management that they understand their responisibility for design and implementation of internal controls which enable company to prepare FSs
Preconditions for an audit ISA 210 (obtain access records)
Obtain agreement from management that they understand their responisibility with access to all records relevant to financial statements
Prevention and detection of fraud and error (ISA 240 obtain reasonable MM)
Conduct audit using ISA 240 and obtain reasonable assurance that FSs are free from material misstatement
Prevention and detection of fraud and error (report parties)
Must report fraud to appropriate parties
Prevention and detection of fraud and error (obtain evidence responses)
Obtain appropriate evidence regarding assessed risks of MM due to fraud, through implementing appropriate responses
Prevention and detection of fraud and error (engagement team fraud)
Whole engagement team is aware of risks and responsibilities for fraud and error
Type of threat when managing director suggests all audit staff go to luxury hotel?
Self-interest and familiarity threat -> less likely for audit staff to challenge assumptions
Appropriate safeguard for when managing director suggests all audit staff go to luxury hotel?
Offer should be decilined
Type of threat when audit fee is renegotiated as percentage of company’s net profit?
Self-interest threat -> audit team may feel incentivised to allow incorrect accounting treatements to maximise profit
Appropriate safeguard when audit fee is renegotiated as percentage of company’s net profit?
Auditor should not agree to such fees and that audit fee needs to reflect level of work and experience of the team
Type of threat when approached by related company to assist with acquisiton target?
Advocacy threat -> Potentially promotoing another company as an investor
Appropriate safeguard when approached by related company to assist with acquisiton target?
Auditor must ensure they don;t make management decisions. Include reviewer not involved in providing the audit service
What is professional scepticism?
A questioning mind that’s alert to conditions which may indicate possible misstatement due to fraud or error
Professional scepticism to increasing receivables collection period and management doesn’t want to increase allowance?
Whether management’s assessment of recoverabiltiy is reasonable, as any increase in allowance reduces profit
Professional scepticism for reliance on bank overdraft?
Management may want to overstate profit and understate liabilities so bank overdraft renews
Professional scepticism for revenue recognition?
Look at a company’s revenue policy to decude whether judgement may be involved as a way to manipulate revenue