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Audit & Assurance (F8) > Revision > Flashcards

Revision Flashcards

1
Q

What are the 5 elements of an assurance engagement?

A
  • 3 Party Relationship
    (Auditor, Director, Shareholder)
  • Appropriate Underlying Matter
    (Financial Statements)
  • Suitable Criteria
    (Accounting Standards)
  • Sufficient Appropriate Evidence
  • Written Assurance Report
    (For Intended User)
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2
Q

Limited Level of Assurance

A

Assurance presented in a negative way whereby the auditors state “nothing has come to their attention” that causes them to believe the FS are not free from material error.

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3
Q

Reasonable Level of Assurance

A

Assurance presented in a positive way, stating that the FS conforms in all material respects with the identified criteria.

Stating that the FS give “true + fair” view

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4
Q

Appointment of Auditors

A
  1. Ensure the audit firm is INDEPENDENT.
  2. Ensure NECESSARY RESOURCES are available (e.g. staff, time, expertise) and staff are competent.
  3. Assess the RISK of taking on the new client and assess INTEGRITY of key staff.
  4. Ensure no CONFLICTS OF INTEREST.

Once satisfied with above:

  • Ask client for permission to speak with previous auditor.
  • If client denies, REJECT audit.
  • Contact previous auditor and ask if there are any “RELEVANT MATTERS”
    (e.g Client pays and acts with integrity)
  • Outgoing auditor should ask client for permission before providing a response.
  • If denied, should inform new auditor of denial
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5
Q

Rights of Auditor

A
  • Access to the company’s books, accounts and vouchers.
  • Receive all information necessary for their duties as auditors.
  • Receive all communications relating to written resolutions.
  • Receive all notices of any general meetings.
  • Can attend and be heard at any general meeting which concerns them as the auditor.
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6
Q

Who can remove an Auditor, and what must be produced on removal?

A

Auditors can only be removed by shareholders at a general meeting with the majority vote.

Must produce “statement of circumstances”. If removed before end of term, must inform ACCA.

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7
Q

Resignation of Auditor

A

An auditor can resign, at any time, in writing.

In all cases, the auditor must submit a “statement of circumstances” explaining any issues involved with the auditor ceasing their duties.

STATEMENT MUST BE SUBMITTED!

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8
Q

Limitations of External Audits

A
  1. Heavily reliant on integrity of client management’s honesty.
  2. Limited amount of time at clients premises meaning using sample basis to undertake testing.
  3. Nature of financial reporting includes management judgement, which could be bias.
  4. Auditors plan to detect material errors and frauds only - meaning minor errors may not be detected.
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9
Q

What is corporate governance and who is it followed by?

A

Corporate governance refers to the way in which companies are organised and controlled.

This is a model used by listed companies.

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10
Q

What are the differences between EDs and NEDs?

A

EDs:

  • Involved in day to day running of the company.
  • Usually full time employees.
  • Paid a salary.

NEDs:

  • Independent
  • Part time directors who scrutinise company affairs.
  • Paid a fixed fee.
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11
Q

UK Corporate Governance
Board Leadership & Company Purpose

A

BREAD

  • Board should establish company’s purpose, values and strategy.
  • Ensure necessary resources are in place to meet objectives and measure performance.
  • Board should establish effective controls which enable risk to be assessed and managed.
  • Effective engagement from shareholders/stakeholders.
  • Ensure workforce policies and practices are consistent with company values.
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12
Q

UK Corporate Governance
Division of Responsibilities

A

BREAD

  • The chair leads the board and is responsible for its overall effectiveness in directing the company.
  • Board should include an appropriate balance of EDs and NEDs.
  • NEDs should have sufficient time to meet their board responsibilities.
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13
Q

UK Corporate Governance
Evaluation, Composition & Succession

A

BREAD

  • Appointments to the board should be a formal, vigorous procedure and should promote diversity.
  • Company should have a nominations committee that decide.
  • Nominations committee should be regularly refreshed.
  • Annual evaluation of composition and diversity.
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14
Q

UK Corporate Governance
Audit Risk and Control

A

BREAD

  • Board should establish policies and procedures to ensure independence and effectiveness of internal and external audit functions.
  • Companies should have an audit committee made up of independent NEDs.
  • Should manage risk, oversee internal controls and determine principal risks company can take to achieve goals.
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15
Q

UK Corporate Governance
Remuneration

A

BREAD

  • No director should be involved in deciding their own remuneration outcome.
  • Company should have a remuneration committee to decide this.
  • This committee should exercise independent judgement when authorising remuneration outcomes.
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16
Q

What could impair a NEDs independence?

A
  • Currently or has been an employee of the company within the last 5 years.
  • Has or has had, a material business relationship in the last 3 years.
    (Partner, Shareholder, Director or Senior Employee.)
  • Has close family ties with any of companies advisers, directors or senior employees.
  • Holds cross directorships or significant links with other directors.
  • Represents a significant shareholder.
  • Has served on the board for more than 9 years from the date of their first appointment.
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17
Q

What are the responsibilities of an audit committee?

A
  • Monitor integrity of the FS.
  • Provide advice on accounts.
  • Review internal financial controls.
  • Monitor and review internal audit function.
  • Review and monitor independence of the external auditor.
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18
Q

Advantages of Audit Committee

A
  • Made up of part time NEDs so they have more time to review key areas.
  • Increases public confidence in credibility of FS.
  • Shareholders may view this as an internal control, leading to stronger control environment.
  • Financial knowledge and expertise to hand when producing FS.
  • Easier for company to raise finance due to perception of good corporate governance.
  • Bridge between external auditor and the board, maintaining external auditors independence.
  • Internal audit can report to them.
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19
Q

Limitations of Audit Committee

A
  • Finding suitable candidates are hard to find with relevant knowledge.
  • Board may view NEDs as having too much power.
  • Slower decision making due to adding another layer to process.
  • Cost of audit committee.
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20
Q

Purpose of Engagement Letter & Items
The Letter Should Include

A

Provides a written agreement between the auditor and the client.

  • Objective of the audit of FS.
  • Managements responsibilities.
  • Auditors Responsibilities.
  • Provision of access to all records.
  • Arrangements to plan audit.
  • Basis on which fees are calculated.
  • Agreement to provide letter of rep.
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21
Q

What sources of information would be of use to gain an understanding about a company?

A
  • Prior year audit file, to find out how issues in the prior year are dealt with.
  • Prior year financial statements, which would show key accounting policies and disclosures.
  • Accounting systems notes, to find out how each system operates.
  • Discussions with management, to obtain any important issues in the year.
  • Current year budgets and management accounts, to find out if client has changed materially since last year.
22
Q

What are the % used to estimate materiality levels?

A

1% of Revenue

1% of Total Assets

5% of Profit before Tax

23
Q

Explain why Analytical Procedures are used in 3 stages of the audit?

A

AP must be performed at the PLANNING STAGE in order to assess the risk and obtain understanding of the entity.

AP must be performed during the FINAL AUDIT as a substantive test, to assess the reliability of data and investigate any unexpected differences.

AP must be carried out in an overall review at the END OF AUDIT, to conclude whether the FS as a whole are consistent.

24
Q

Benefits of Planning an Audit

A
  • Help auditor devote appropriate attention to important areas of the audit.
  • Help auditor identify and resolve potential problems on a timely basis.
  • Help develop an audit strategy.
  • Assisting in the selection of engagement team members with appropriate level of skills and competence.
  • Directing and supervising engagement team members and reviewing their work.
  • Assisting in the coordination of work completed by others.
25
Q

Advantages of 3 commonly used methods to record internal control systems?

A

Narrative Notes:

  • Simple & Quick
  • Easy to understand

Flowcharts:

  • Easier to identify missing internal controls
  • Visual aid makes it easier to record more complex systems

Questionnaires:

  • Quick to prepare (cost effective)
  • All controls are recorded, so missing controls are clearly highlighted.
  • Simple to complete
26
Q

Disadvantages of 3 commonly used methods to record internal control systems?

A

Narrative Notes:

  • Can be cumbersome especially if system is complex
  • Can make it more difficult to identify missing internal controls, as notes record detail but not exceptions.

Flowcharts:

  • Time consuming to prepare
  • Staff need training to prepare and understand.

Questionnaires:

  • Company could easily overstate level of controls present
  • Needs to be tailored to each client, or unusual controls might be missed
27
Q

Control Objectives of Sales & Despatch System

A
  • To ensure orders are only accepted if goods are available for despatch.
  • To ensure all orders are recorded completely and accurately
  • To ensure goods are not supplied to poor credit risks.
  • To ensure all goods are despatched in a timely manner.
  • To ensure goods despatched are good quality.
  • To ensure all goods are correctly invoiced
28
Q

Describe the matters the auditor would take into consideration to decide whether a deficiency is significant.

A
  • Likelihood of leading to material misstatement in the FS
  • Susceptibility of the related asset to loss or fraud
  • Cause and frequency of the exceptions detected as a result of deficiencies in the controls.
  • Volume of activity that could occur in the account balance exposed to the deficiency.
29
Q

Why is it important to communicate matters with TCWG?

A
  • Assists understanding of matters relating to the audit.
  • Helps the auditor obtain information relevant to the audit.
  • Assists TCWG in fulfilling their responsibilities to oversee financial reporting process and reducing risks of material misstatements.
  • Promotes effective two-way communication between the auditor and TCWG.
30
Q

Risk Assessment Procedures

A

Procedures to obtain an understanding of the entity and it’s environment, to be able to assess risks of material misstatements in the FS.

31
Q

Tests of Controls

A

Procedures to test the operating effectiveness of controls in preventing, or detecting material misstatements.

32
Q

Substantive Procedures

A

Procedures to detect material misstatements in account balances and disclosures.

33
Q

What are the 6 financial statement assertions?

A
  • Existence
  • Rights & Obligations
  • Completeness
  • Valuation
  • Classification
  • Presentation
34
Q

FS Assertion - Existence

A

To ensure assets, liabilities and equity interests exist.

Implication:

Accounts staff can take an auditor and show them the asset.

To Prove:

Go and look at a machine listed on the FAR and confirm it’s the right machine by checking the serial number.

35
Q

FS Assertion - Rights & Obligations

A

The entity holds or controls the rights to assets and liabilities.

Implication:

The accounts staff can show the auditor the legal documentation showing the asset belongs to the company.

To Prove:

The auditor can look at the document and confirm the legal title.

36
Q

FS Assertion - Completeness

A

All assets, liabilities and equity that should have been recorded have been recorded & all disclosures that should have been recorded have been recorded.

Implication:

The auditor should not be able to pick out any invoice and not be able to find it reflected in the companies books.

To Prove:

The auditor can look at payments made within the credit period of the companies suppliers and trace these payments back to an invoice prior to the year end.

37
Q

FS Assertions - Valuation

A

Assets, liabilities and equity interests have been included at an appropriate value.

Implication:

Accounts staff have recognised value in accordance with accounting standards and business events.

To Prove:

The auditor should be able to confirm the cost of an item to its purchase invoice. For revalued assets, the auditor should look at a formal valuation sheet or compare to market prices. For impaired assets, should be able to verify by checking sales invoices after items are sold to see how much they were sold lower than cost.

38
Q

FS Assertion - Classification

A

Assets, liabilities and equity interests have been recorded in the correct accounts.

Implication:

Accounts staff have correctly classified long term assets as non current and short term assets as current assets.

To Prove:

Auditors can use their own knowledge about assets or look at legal documentation relating to the particular asset.

39
Q

FS Assertion - Presentation

A

Assets, liabilities and equity interests are appropriately aggregated and disaggregated. Disclosures are understandable and in line with IFRS.

Implication:

The person who has prepared the FS has complied with the presentation requirements of IASBs and law.

To Prove:

Auditor can review the FS and confirm the presentation and disclosures look appropriate in their context of professional understanding and their knowledge of their business.

40
Q

Balances = VERP2C

A

Valuation
Existence
Rights & Obligations
Presentation
Completeness
Classification

41
Q

Classes of Transactions - Occurence

A

Transactions that have been recorded/disclosed happened and relate to the entity.

Implication:

Accounts staff should be able to point auditors to relevant documents to prove transactions were made by the company.

To Prove:

Auditors can look at relevant documents (sales invoice & customer order) to confirm the transaction has occurred.

42
Q

Classes of Transactions - Completeness

A

All transactions, events and disclosures that should have been recorded have been recorded.

Implication:

  • Auditors should not find references in the company records (eg board minutes) or external records suggesting the existence of items which should be in the FS.

To Prove:

Auditors would be alert to such indicators when reviewing company information and third party information to any suggestion of exclusions.

43
Q

Classes of Transactions - Accuracy

A

Amounts of other data relating to recorded transactions and amounts have been recorded appropriately and accurately described.

Implication:

Accounts staff should be able to justify amounts/disclosures with reference to evidence.

To Prove:

Auditors should be able to examine available evidence which corroborates the accuracy of such information.

44
Q

Classes of Transactions - Cut Off

A

Transactions and events have been recorded in the correct accounting period.

Implication:

Invoices are only posted when goods have left the premises.

To Prove:

Auditors can match GDNs with invoices to ensure sales are posted in the correct period.

45
Q

Transactions = COCCAP

A

Completeness
Occurrence
Classification
Cut Off
Accuracy
Presentation

46
Q

Classes of Transactions - Classification

A

Transactions and events have been classified in the correct accounts.

Implication:

This could be matters such as distinguishing between admin payroll and sales related payroll.

To Prove:

Auditors can scrutinise records to ensure that classifications appear correct.

47
Q

Classes of Transactions - Presentation

A

Transactions are appropriately aggregated or disaggregated. Disclosures are understandable and in line with IFRS requirements.

Implication:

For example if company acts as a middle man, is still shows sales and purchases in its FS, rather than only accounting for the net of them both.

To Prove:

Auditors can scrutinise records and FS to ensure presentation appears correct.

48
Q

Audit Procedures - AEIOU

A

Analytical Procedures
Enquiry
Inspection
Observation
Recalculation

Confirmation
Reperformance

49
Q

What tests are there for Accounting Estimates?

A
  • Review process used by management for reasonableness (expected life of 5 years is actually 5 years).
  • Perform analytical procedures on the estimate budget against actual figures and discuss any variations with management.
  • Use an independent expert to make an estimate for comparison.
  • Review the accuracy of prior years estimates compared to final actual results.
50
Q

“Describe Audit Procedures”

A

State what you will actually do (look at, match, ask etc.)

Explain why (outline the assertion being proved.

Existence = Auditing Assets (could be overstated)

Completeness = Auditing Liabilities (could be understated)

Audit & Assurance (F8) (3 decks)

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