Possible test questions Flashcards
What is Auditing?
An unbiased examination and evaluation of the financial statements of an organization. It can be done internally (by employees of the organization) or externally (by an outside firm).
What are the different levels of assurance
Reasonable assurance
Moderate assurance
No assurance
Describe the different levels of assurance
Reasonable assurance
This means that the auditor has done adequate work to report with reasonable certainty that the information being assured is, or is not, reliable.
Moderate assurance
This means that the auditor has done adequate work to report whether or not anything came to their attention that would lead them to believe that the information being assured is not worthy of belief.
No assurance
In such circumstances an assurance provider must ensure when reporting to users that they make clear that they are merely reporting the activities that they have performed (and in some engagements, their findings) and are not providing assurance.
When would each level or assurance be used?
Reasonable assurance
When an auditor is in the position to say whether in their opinion the financial statements are in accordance with relevant laws and accounting standards and they present fairly the financial position of the reporting entity.
Moderate assurance
The auditor is not in a position to say that in their opinion the financial statements are in accordance with the relevant law and accounting standards, and does present fairly the financial position and performance of the reporting entity.
No assurance
When an engagement where no assurance is provided is a compilation engagement, where an auditor compiles the financial information as provided by the client and arranges it into a set of financial statements.
Threats to independence
Self-interest threat Self-review threat Advocacy threat Familiarity threat Intimidation threat
Legal liability to clients
A client can establish that the auditor owed them a duty of care in one of two ways: (1) under contract law for breach of contract or (2) under tort law for negligence.
Under contract law …
a client can sue the auditor for breach of contract. This action may be taken when the auditor fails to live up to their responsibility implicit in agreeing to act as the auditor and explicit in the engagement letter. For example, if the auditor withdraws from an audit without cause, before completing the audit and issuing the report, the client can sue the auditor for breach of contract.
Under the tort of negligence …
a client can claim that the auditor failed to take reasonable care in the performance of the audit. This means that the work was below the standard that may be reasonably expected from a designated public accountant. The injured party must prove that the auditor’s carelessness or unintentional behaviour caused harm and therefore breached the duty of care.
Legal liability to third parties
Establishing that a duty of care is owed to third parties is not straightforward. Third parties include anyone other than the client and its shareholders who use the financial statements to make a decision (for example, creditors). As third parties generally do not have a contractual relationship with the auditor, they must rely on tort law. The key difficulty for third parties is establishing that a duty of care was owed to them by the auditor.
Contributory negligence
means that where a plaintiff (the party suing) and the defendant (the auditor) can be proven to have been negligent, each party must be held accountable in proportion to their guilt.
To prove that an auditor has been negligent
a plaintiff, whether a client or a third party, must establish that an auditor did not comply with auditing standards, ethical pronouncements, or some element of the law in place at the time the auditor conducted their audit
Stages of an Audit
Planning an audit
Performing an audit
Concluding and reporting on an audit
Explain the stages of an audit
Planning an audit
Learning more about the client and industry.
Performing an audit
The performance, or execution, stage of the audit involves detailed testing of controls, transactions, and balances.
Concluding and reporting on an audit
The final stage of the audit involves drawing conclusions based on the evidence gathered and arriving at an opinion regarding the fair presentation of the financial statements.
Audit risk model
The model states that audit risk is inherent risk multiplied by control risk multiplied by detection risk
High-risk client
Audit risk = Inherent risk (high) x Control risk (high) x Detection risk (low)
Low-risk client
Audit risk = Inherent risk (low) x Control risk (low) x Detection risk (high)
three components of audit risk
Inherent risk
Control risk
Detection risk
Inherent risk is also assessed at the assertion level for classes of
transactions, account balances, and disclosures
Audit risk model Formula with Audit risk strategy
Audit strategy—high-risk client
Audit risk
Inherent risk (High) x Control risk (High + No (or very limited) tests of controls) x Detection risk (low + Increased reliance on substantive tests of transactions and account balances)
Audit strategy—low-risk client
Audit risk
Inherent risk (low) x Control risk (low and Increased reliance on tests of controls) x Detection risk (High + Reduced reliance on substantive tests of transactions and account balances)
Assertions about classes of transactions and events for the period under audit
Occurrence
Transactions and events that have been recorded have occurred and pertain to the entity.
Completeness
All transactions and events that should have been recorded have been recorded.
Accuracy
Amounts and other data relating to recorded transactions and events have been recorded appropriately.
Cut-off
Transactions and events have been recorded in the correct accounting period.
Classification
Transactions and events have been recorded in the proper accounts.
Assertions about account balances at year end
Existence
Assets, liabilities, and equity interests exist.
Rights and obligations
The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
Completeness
All assets, liabilities, and equity interests that should have been recorded have been recorded.
Valuation and allocation
Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.
Assertions about presentation and disclosure
Occurrence, rights, and obligations
Disclosed events, transactions, and other matters have occurred and pertain to the entity.
Completeness
All disclosures that should have been included in the financial statements have been included.
Classification and understandability
Financial information is appropriately presented and described, and disclosures are clearly expressed.
Accuracy and valuation
Financial and other information is disclosed fairly and at appropriate amounts.
