Past Test Questions Flashcards
- Describe the nature of an audit
An audit is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.
Explain the purpose of a financial statement audit in terms of its scope, users, and level of assurance.
- A financial statement audit obtains evidence to validate management’s assertions about economic actions and events against selected criteria and communicates that to the users
- A financial statement audit is the audit of financial statements for a specific period
- The intended users are the shareholders and selected others.
- A financial statement audit provides reasonable assurance that the financial statements are free from material misstatement, are credible and can be relied upon.
- Describe the nature and purpose of an assurance engagement.
- broad term
- any situation where information is prepared by one party
- then attested to its accuracy by another party. Purpose of an assurance engagement = express conclusion intended to increase the confidence of intended users.
- Assurance engagements include:
- audit (usually relates to a financial statement audit)
- include assurance on other financial and non-financial information.
- E.gs. environmental audits, compliance audits, review engagement.
The level of assurance provided can vary: according to the type of engagement
e.g. a review engagement such as an interim financial statement audit provides limited assurance whereas an audit provides reasonable assurance the financial statements are free from material mis-statement.
elements of an assurance engagement.
- A three-way relationship
- Subject matter of an assurance engagement
- Suitable criteria based on…
- Evidence gathering
A three-way relationship
- A responsible party (e.g., directors), an intended user (e.g., a shareholder), and an assurance practitioner (the auditor)
Subject matter of an assurance engagement
- Historical financial information, performance related, physical system or processes, behaviour e.g., corporate governance
Suitable criteria based on…
- Relevance, completeness, reliability, neutrality and understandability
- E.g., financial reporting framework and accounting standards to determine the outcome of the audit
Evidence gathering
- A conclusion or assurance report e.g., audit report
Explain how agency theory results in a demand for auditing.
In an agency relationship, investors (as principals) entrust their resources to managers (as agents). The assumption is that managers act in their own self-interest and not the principals’ interest, giving rise to agency costs. Consequently, investors will ‘price protect’ themselves on the assumption that managers are acting for themselves. They will demand a financial statement audit to monitor the actions of managers, verify the assertions made by management and that they have acted appropriately so reduce the risk of business failure
Explain the role of auditing and assurance standards in the auditing profession within Aotearoa New Zealand.
Audit and assurance standards provide minimum guidance for auditors to help determine the extent of steps and procedures that should be applied to fulfil the objective of the audit or assurance engagement. They are the criteria or yardsticks against which the quality of audit or assurance results are evaluated.
six (6) phases of the audit process.
- Phase I: Perform risk assessment procedures
- Phase 2: Assess the risk of material misstatement
- Phase 3: Respond to assessed risks
- Phase 4: Perform further audit procedures
- Phase 5: Evaluate audit evidence
- Phase 6: Communicate audit findings
Phase I: Perform risk assessment procedures
Identify financial statement assertions, understand the entity and its environment, make decisions about materiality, perform analytical procedures, identify risks of material mis-statement including understanding the internal control system
Phase 2: Assess the risk of material misstatement
Determine size of mis-statements, and likelihood of mis-statement and significant inherent risks
Phase 3: Respond to assessed risks
Includes audit staffing, nature, timing, and extent of audit tests
Phase 4: Perform further audit procedures
Includes tests of controls and substantive tests, quantitative methods to use
Phase 5: Evaluate audit evidence
Appropriate evidence is gathered and evaluated including journals, ledgers, source documentation
Phase 6: Communicate audit findings
Communication via audit report opinion to intended users of the report and to other parties including the audit committee
Describe the steps involved in the audit planning process.
- Planning starts with an understanding of the entity and its environment.
- Planning also involves setting materiality levels,
- assessing audit risk and its components,
- obtaining an understanding of the internal control structure and then
- developing a preliminary audit strategy for significant assertions. Auditors should also perform analytical procedures as part of the planning process as well as consider the risk of fraud.
- Analyse how the scope of the auditing environment has changed in the last 30 years.
The auditing environment has changed in the last 30 years through:
- Changes in the NZ economy and increased privatisation of services such as rail and telecommunications in New Zealand resulting in bigger organisations that have less regulation of their economic activities
- economic crisis (removal of trade barriers (tariffs), labour market restrictions and overseas ownership) and
- Corporate collapses related to accounting mis-statements, internal controls and apparent failure of auditors
Describe the nature of ‘corporate governance’.
Governance is the exercise of economic and administrative authority necessary to manage entities affairs. Governance is concerned with the process by which decisions are made and implemented so that the entity’s affairs are conducted properly and in accordance with the laws and regulations.
three corporate governance issues that impact the external auditor’s roles.
Corporate governance issues include:
risk management
internal control
earnings management.
Risk management
Risk management is the culture, process and system established to manage opportunities and minimise or control risks. Risk management is a broad concept and is not only confined to health and safety and includes business continuity, corporate governance, and fraud.
Internal controls
Internal controls are the policies and procedures an organisation puts in place to ensure business is operated in an orderly manner and to prevent and detect fraud, error, misappropriation of assets and non-compliance with policies and procedures.
Earnings management
- Earnings management is when management manipulates financial statements and transactions to influence the public perception about the financial performance of the entity. Earnings management techniques include use of accruals, revenue recognition, restructuring charges, estimation of liabilities, delaying sales, and manipulation of research and development write-offs.