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