revision Flashcards
what are the fundamental ethical principles?
integrity, objectivity, professional competence and due care, confidentiality, professional behaviour
what are the main ethical threats that an auditor must safeguard against?
self interest, self review, advocacy (promoting client), familiarity, intimidation
what powers are given to an auditor to carry out their work?
access to books and records
receive all information and explanations auditor deems necessary for audit
receive notice and attend meetings
notice and meetings to propose auditor removal
right to ask for meeting upon resignation
what are the overall objectives of an audit?
obtain reasonable assurance that the financial statements are free from material misstatement
report that the financial statements and communicate in accordance with ISA’s
what are the elements of the audit risk model?
inherent risk, control risk, detection risk
why do auditors send an engagement letter?
to establish whether the preconditions of an audit are there
to confirm there is an understanding between the auditor and management and those charged with corporate governance
what are the typical contents of an engagement letter?
confirm scope and objectives of audit
state responsibilities of the auditor
state responsibilities of management
identify the reporting framework
confirm basis of fees
state if management representatives will be required
request management confirm agreement of the letter
what objectives must an auditor meet to maintain appropriate quality in an audit?
audit must comply with professional standards and legislation
audit report issued is appropriate for the circumstances of the client
what are the responsibilities of the engagement partner regarding quality control of the audit?
ensure quality control standards are followed
ensure ethical standards are followed
maintain independence from client
ensure auditor is appointed correctly
check audit team have sufficient experience
review work carried out
appoint quality control reviewer
what are the qualities of good audit documentation?
provides sufficient appropriate record to support auditors report
provides evidence that the audit was planned in accordance with ISA’a and applicable legislation
why does the auditor produce audit documentation?
helps plan the audit
evidence that the work has been carried out
shows who produced the documentation
evidence to assist in planning of future audits
shows quality control standards have been followed
shows auditor complied with ISA’s and other relevant regulations
what are the auditors responsibilities regarding fraud?
determine if the financial statements have material misstatements caused by fraud
obtain evidence to decide whether material misstatement has occurred due to fraud
if fraud is found, report to management
what is the normal audit work regarding fraud?
maintain attitude and professional skepticism
found out how management assess fraud risk
assess risk of material misstatement due to fraud
evaluate evidence obtained
share concerns with those charged with corporate governance
what situations does the auditor report in a management letter?
controls are designed, implemented or operated in a way that will not prevent material misstatement
controls to prevent material misstatements are missing
what does the management letter say about each internal control deficiency?
explains the deficiency
descriptions on the potential effect of deficiency
suggest actions to overcome deficiency
what are the benefits of audit planning?
devote attention to appropriate areas of audit
identify and resolve problems in a timely manner
audit performed efficiently and effectively
select appropriate members of audit team
assist direction of audit
coordinates work with auditors and experts
what is the audit strategy?
overall approach to the audit:
audit scope, timing, direction
identifies risky areas for the attention of the audit
what us the audit risk model?
control risk x inherent risk x detection risk = audit risk
what are the four stages of assessing risk in an audit?
initial procedures to identify risk, i.e talk to management and analytical procedures
obtain information about the client and industry, assess inherent risk
obtain information about the clients internal control systems, assess control risk
determine where and whether a material misstatement could occur
in assessing internal controls systems, what are the internal control elements?
control environment
entity’s risk assessment procedures
information systems
control activities
monitoring of controls
what are the main control activities that an auditor can place reliance on?
performance reviews
application controls
general IT controls
physical controls
segregation of duties
authorization controls
why can audit procedures give an incorrect result?
sampling risk: sample chosen is not representative of the population
non sampling risk: the auditor applies audit procedures incorrectly
what are the audit assertions relating to the income statement?
occurrence - transaction actually occurred and belongs to the entity
completeness - all transactions are recorded
accuracy - amounts are recorded correctly
cut off - recorded in correct accounting period
classification - recorded in correct amounts
what are audit assertions relating to the statement of financial position
Existence - items actually exist
rights and obligations - entity owns the asset or has obligation to pay liability
completeness - all assets and liabilities are recorded
valuation and allocation - assets and liabilities in financial statements are at appropriate amount
What is materiality?
materiality - the amount by which a figure in the financial statements must change to influence the economic decisions of users of the financial statements
performance materiality - the amount used by the auditor in planning the audit procedures - less than matreriality itself
what are the guidelines for materiality?
profit before tax
gross profit
turnover
what are the steps the auditor uses to collect evidence regarding an identified risk?
identify the risk
determine the level of risk of material misstatement
decide on the audit procedures to collect evidence
review the evidence collected and determine if a material error has occured
what procedures can an auditor use to collect audit evidence?
substantive analytical procedures
test of detail
test of controls
why must an auditor evaluate misstatements?
to find the effect of identified misstatements on the audit
to find the effect of uncorrected misstatements on the financial statements
what steps must the auditor take when misstatements are identified?
keep a record of misstatements found
decide whether the audit plan needs revised for misstatements found
ask management to correct misstatements
evaluate the effect on financial statements of uncorrected misstatements
inform management about misstatements
obtain management representation letter
consider effect on audit report for unadjusted misstatements
what types of audit procedure can be used to collect audit evidence?
inspection
observation
external confirmation
recalculation
re-performance
analytical procedures
inquiry
what are the characteristics of good audit evidence?
relevant to the assertion being tested
reliable: from independent sources obtained directly by the auditor documentary evidence original documents
what are the key points regarding external confirmations?
good source of evidence
must be sent by auditor and received back to auditor
can save time during the audit
positive confirmation, it provides more reliable evidence than negative
what are the steps for carrying out effective analytical procedures?
ensure analytical procedures can be used
ensure data used in analytical procedures is reliable
form an expectation of figures in financial statements from the data
compare expectation to financial statements.
when can the auditor use analytical procedures?
start of the audit
during the audit
end of the audit
what are the steps for conducting a test using sampling?
identify purpose of audit procedure
determine the sample size
select items for testing
perform audit procedures on those items
when required, use alternative items for testing
determine reason for errors found
calculate population misstatement
evaluate results of testing
what types of sampling method can an auditor use?
random ( use of random number tables)
systematic ( every nth item)
Monetary unit sampling ( sampling unit in $)
haphazard ( uses skill and judgement)
Block (items next to each other i.e everything in april)
what is the standard audit work on related party transactions?
try to identify related parties
look out for related party transactions during an audit
assess the risk of material misstatement due to related party transactions
keep audit team and management informed concerning related party transactions found
consider effect of transactions found on audit opinion
what are related parties?
people or entity that have a direct or indirect equity stake in the audited entity
holdings of the audited company in other entities
management or those charged with corporate governance
close family member of those charged with governance
significant business relationship with those charged with governance
what types of subsequent events are there?
events after the reporting date either;
provide evidence of conditions that existed on that date so statements need adjusted
or
provide evidence of conditions that arose after the date so statements do not need adjusted but disclosures required
what are the auditors responsibilities regarding subsequent events?
identify events
ensure financial statements are amended as required
what are the auditors responsibilities regarding a going concern?
obtain sufficient evidence to confirm management are right to use the going concern assumption to prepare financial statements
conclude whether there is material uncertainty regarding the use of the going concern assumption
determine the implications of the audit report if any of the above are identified
what are the normal audit procedures with respect to the going concern assumption?
ask management to make an assessment of companies going concern status
review plans that show the company should continue trading
evaluate cash-flow forecasts
review any other relevant data
obtain management representation point
what is the process of obtaining a management representation letter?
auditor decides contents of representation letter
auditor prepares letter and send draft to management
management review and sign the letter
auditor files letter in working papers as audit evidence
what are the normal contents of a management representation letter?
management confirm statements are prepared in accordance with appropriate framework
management provide auditor with all the information and explanations required for audit
management confirm all transactions recorded in financial statements
is the work of internal auditors adequate?
review auditors
objectivity
technical competence
due professional care
is the internal audit work of sufficient standard?
check:
staff have relevant training
staff properly supervised
evidence obtained to support their conclusions
final report based on those conclusions
problems found have been resolved
how does the auditor decide if an expert is competent , capable and objective?
obtain evidence of:
personal knowledge of the expert
recommendations from other auditors
expert is qualified
expert has published work
how does the auditor evaluate the work of an expert?
compare to other audit evidence obtained
ensure assumptions and conclusions are reasonable
ensure data used by the expert is complete and accurate
what must the auditor report on?
whether the statements represent a true and fair view of the entity’s financial position
the financial statements are prepared in accordance with the applicable frame work
other matter prescribed by statute
what are the elements of an unmodified audit report?
title
address
intro paragraph
managements responsibility for statements
auditors responsibility
auditors opinion
signature of auditor
date of report
auditors address
on what grounds is an audit report qualified?
auditor concludes from evidence obtained that financial statements are NOT free from material misstatements
auditor is unable to obtain sufficient evidence audit evidence to conclude financial statements are free from material misstatement
how does the auditors report change depending on the seriousness of the situation?
no material misstatement - unmodified report
Material - except for paragraph for both misstatement and lack of evidence
material and pervasive -
adverse opinion
disclaimer opinion for lack of evidence
what types of modified / unqualified reports are there?
emphasis of matter - referring to matters in the financial statements
other matters - anything else that the auditor wishes to bring to the attention of the users of the financial statements
what are examples of emphasis of matter paragraphs?
uncertainty of the outcome of litigation
early application of an accounting standard
ongoing major disasters affecting the company
what are the auditors responsibilities regarding comparative information?
obtain sufficient and appropriate evidence to ensure comparative information is presented in accordance with the applicable financial reporting framework
report in accordance with auditors reporting responsibilities
when does the auditor have to report?
auditor will normally report where:
the prior years audit report was qualified and the matter is unresolved
audit evidence obtained during the year suggests a material misstatement in the figures
prior year statements audited by another auditor
how can other information differ from the audited financial statements?
inconsistent - other information contradicts or is different from the audited financial statements
misstatement of fact - other information does not appear in the financial statements but it is incorrect
what does the auditor do if other information is different from audited information?
assuming that the financial statements or other information are not changed, then actions are;
other information is correct - qualify opinion on the financial statements
financial statements are correct - issue an other matter paragraph
