Section A Rote Flashcards
Element of an assurance engagement (C)
Criteria
Element of an assurance engagement (R)
Report
Element of an assurance engagement (E)
Evidence
Element of an assurance engagement (S)
Subject matter
Element of an assurance engagement (3)
3 party relationship
Definition of an external audit?
Gives an opinion on the financial statements of a company are fairly presented, independent
How are operating licence and hygiene regulations effect according to ISA 250?
Don’t have a direct effect on FSs but can have a material effect
When there’s no direct effect but possible material effect according to ISA 250?
Should perform specific audit procedures
What is a reasonable assurance engagement?
A high but not absolute level of assurance
Is a reasonable assurance assurance report positive or negative?
Positive
Is a limited assurance assurance report positive or negative?
Negative
Is a statutory audit reasonable or limited?
Reasonable
Is a review of cash flow forecasts reasonable or limited?
Limited
What is an engagement partner responsible for?
Direction, supervision, performance and review of an audit
Is it a strength or deficiency if the audit team as a whole takes collective responsibility for the audit?
Deficiency
Should chief internal auditor be part of the audit committee?
No
Should executive director be part of the audit committee?
No
Should non-executive director be part of the audit committee?
Yes
What can give a bank confidence in lending money to a company (in terms of audit committee)?
Have at least one member who has relevant financial experience
Benefit of data analytics over CAATs?
Do not require significant tailoring time as they are standardised
Is not establishing an internal audit function a corporate governance deficiencies?
NO
Elections and corporate governance deficiencies?
Directors should be subject to annual re-election
How should board be composed in corporate governance?
At least 50% should composed of non-executive directors (excluding the chair)
When there’s an absence of a member with relevant financial experience?
That mev bmber must be recruited
Responsibility of directors for internal controls? (annually shareholders)
To review internal controls annually, to report on internal control to shareholders
What are threats to fundamental principles? (S-I)
Self-interest
What are threats to fundamental principles? (S-R)
Self-review
What are threats to fundamental principles? (A)
Advocacy
What are threats to fundamental principles? (F)
Familiarity
What are threats to fundamental principles? (i)
Intimidation
When audit engagement partner and finance director go on holiday together, what are the risks?
Familiarity and self-interest. Rotation of audit partners
ACCA Code of Ethics of Conduct, in relation to audit team being offered 10% discount on mobile phones?
Should not be accepted, unless it is trivial and inconsequential
What services can audit firms provide to a firm?
If it does not assume a management responsiblity
What is a self-interest threat?
Risk of fianncial interest will inappropriately influence professional accountant’s judgement/behaviour
Where do mandatory safeguards apply to?
Public interest entity audits
How is the scope of external auditor’s work determined?
By the audit engagement partner
What must an audit be in terms of independence from the board?
Must be a completely independent exercise with no influence from the board
Is there a clear division between running the board of directors and running directors in a company’s business?
YES
What does the head of the internal audit department report to?
The audit committee
What is the function of an internal audit department?
For review and monitoring
What is essential for a review of FSs in a limited assurance engagement? (large amounts analytical)
Enquire of management of large and unusual items in FSs
Perform analytical procedures to understand relationship between items and FSs
Is an assurance engagement limited or reasonable?
Reasonable
What is needed to provide an internal audit service to an audit client? (responsible)
Be responsible at all times for internal audit activities
Acknowledge responsibiltiy for processes of internal control
Evaluating the self-review threat (materiality FS)
The materiality of related FS amounts
Evaluating the self-review threat (misstatement)
Risk of misstatement of assertions related to FS amounts
Evaluating the self-review threat (reliance external internal)
Reliance that audit team will place in work of internal audit service
When is audit sampling in performing tests of details an inherent limitation of an audit?
When 100% of all balances and transactions need to be tested
What is a familiarity threat?
Been in charge for too long or a personal relationship
Why is a contingent fee not allowed?
As it’s a self-interest threat
WHat is a contingent fee?
Paid when a specific outcome is achieved
When an audit engagement partner must be removed from the team?
For more than 7 years
If question says Code of Ethics and Conduct?
Focus on ethics
Who is external auditor appointed by?
The shareholders
Who is internal auditor appointed by?
The audit committee
When looking at valuation, what should I ask myself?
Does it change the NUMBER
In audit evidence, is external or internal evidence better for evidence?
External
Are lawyers > customers for evidence in a food poisoning case?
Lawyers are better
When there’s an invoice-in-transit?
Agree to pre-year-end invoice
When there’s cash-in-transit?
Agree to post-year-end cash book and bank statement
If accounts are not amended and there’s a disagreement with client?
The report is modified (due to material misstatement or no evidence)
What conclusions are there in material misstatement?
Adverse or Qualified opinion
When is a material misstatement consdiered adverse?
If it is very very large
When an appropriate adjustment is made to a fnancial statement (audit opinion)
It is unmodified
What is a basis for qualified opinion paragraph done for?
Explain the limitation in relation to lack of evidence over inventory
Is a cash receipt more reliable than correspondence with lawyers when determining recoverability of a debt?
YES
What is the period in which management’s assessment covers?
At least 12 months from date of the financial statements
Example of analytical procedures?
Proof in total
Compare to prior year
What is included within the engagement quality review?
Evaluation of all significant audit judgements
Evaluation of conclusions reached in formulating auditor;s report
What period does management assessment cover?
At least 12 months from date of the FSs
When there’s receivables balance that is an irrecoverable debt (profit)
The profit is overstated
Auditor’s responsibility in relation to subsequent events between auditor’s report and fianncial statements are due to be issued?
Auditor discusses need for adjustments with management
How does an auditor attend an inventory count?
Observes client staff
Reviews procedures for identifying damaged, obsolete and slow-moving invnetory
Which evidence is the most reliable?
Independent 3rd party evidence
What is systematic sampling?
Involves having a constant sampling interval, starting point determined randomly
When is there a legitimate reconciling item? (issuance)
When it is issued before the year end
When supplier statement balance agrees to what is on the purchase ledger?
No further work is required
Most reliable way showing lodgments have been recorded?
Bank statement showing lodgments have been cleared by the bank
Why is asking for something not considered reliable?
As it is verbal evidence, not written evidence
Do auditors prepare financial statements?
NO, management do
1st step in planning of CAATs (objective)
Set objective of CAAT
2nd step in planning of CAATs (determine accessibility entity files)
Determine content and accessibility of entity’s files
3rd step in planning of CAATs (types tested)
Define types of transactions tested
4th step in planning of CAATs (procedures performed)
Define procedures to be performed on the data
Should referencing the work of an external expert be included in an auditor’s report?
NO
Is classification relevant to an audit programme for additions?
NO
How to calculate a bank overstatement?
Customer payments (after year end) - Cheques not posted (after year end)
Do GDNs before or after year-end determine when sales cut-off is applied?
Before year-end
DIfference between substantive and tests of controls?
Confirming understanding of control
Financial statements
When is amount considered material in ISA 320?
1% of total revenue
5% of profit before tax
What is meant by inherent risk?
Suspectibilty of an assertion about a class of transaction to a misstatement before considering any related materials
What is meant by control risk?
Suspectibilty of an assertion about a class of transaction to a misstatement before considering won’t be prevented on a timely basis by entity’s controls
What is meant by detection risk?
Reduce audit risk to an acceptablty low level. Is affected by samplnig and non-sampling risk
What does audit risk compose of?
ROMM and detection risk
Level of assurance in external audit?
Reasonable asurance
Level of assurance in review engagements?
Negative assurance - where nothing comes to their attention
Auditor and laws and regulations (non-compliance TCWG)
Auditor must report non-compliance to management and those charged with governance
Auditor and laws and regulations (procedures non-compliance FSs)
Audit procedures to help identify non-compliance with laws and regulations that have material impact on FSs
Auditor and laws and regulations (aware non-compliance act)
When auditor aware of non-compliance with laws they must obtain understanding circumstances occurred and effect on FSs
Auditor and laws and regulations (non material auditor opinion)
If non-compliance has material effect. Auditor must give qualified or adverse opinion
What is meant by a control environment? (control people overall foundation)
Influences the control consciousness of people and provides overall foundation for operation of other components
What is meant by an entity’s risk assessment process? (iterative process risks)
An iterative process for identifying and analysing risks to achieve entity’s objectives and form basis for determining risks managed
What is meant by an entity’s process to monitor the system of internal control?
Continual process to assess effectiveness of internal control performance over time
What is meant by information system and communication?
Activities, policies and records designed to ensure transactions are accurate
What is meant by control activities?
Proper application of policies in all components of entity’s of direct and indirect controls
ICEQs vs ICQs?
ICEQs are generally easier to apply to a variety of different systems than ICQs
What do ICEQs determine?
Whether there are controls which prevent or detect specified errors
What do ICQs determine?
Determines whether ocntorls exist which meet specific control objectives
Do internal auditors review financial statements?
No, audit committee does
Example of economy for the 3Es?
Lowest cost at which appropriate quantity and quality can be achieved
Example of efficiency for the 3Es?
Relationship between goods and services produced and resources used to produce them
Example of effectiveness for the 3Es?
Extent to which an activity is achieving its policy objectives
What is done first, tests of control or walkthrough tests
Perform tests of control
Perform walkthrough tests
Does scope being set by finance director reduce independence of internal audit department?
YES
What are general IT controls?
Disaster recovery procedures
Testing procedures using test data
What will result in no completeness of payables?
GRNs not be sequentially numbered, which makes it hard to trace
Revenue is overstated and effect on receivables?
Causes a decrease in receivables collection period initially
What assertion needs to be tested when talking about understatement of income?
Completeness
Is an auditor responsible for detecting or preventing an error according to ISA 240?
Detecting, not preventing
Is timetable for provision of accounting information included in an engagement letter?
NO
Is an auditor appointed by those charged with governance within the company?
NO
What isn’t included in an agreement obtained by the auditor?
To prevent and detect fraud
What should be done first when accepting a nomination for an audit?
Communicate with the existing auditors
What should be done second when accepting a nomination for an audit?
Perform client screening procedures to assess risk => then ensure reisgnation of previous auditor has been previously conducted
What is inherent risk?
An item is misstated due to characteristics of that item
What is detection risk?
Auditor’s substantive procedures don’t detect MM
What is control risk?
Internal controls don’t prevent or detect MM
What substantive procedure is inspect relevant purchase invoices for sample of assets on asset register?
Rights and obligations
Does management providing override apply to external or internal auditors?
To external auditors
What are information processing controls?
Processing of information in IT applications
What are general IT controls?
Support the continued proper operation of the IT environment
Observe the invoicing clerk to ensure prices are being matched. Which assertion?
Completeness
Difference between audit strategy and detailed audit plan?
Audit strategy is more general and high level
Detailed audit plan is more specific and actionable
Where does auditor set the performance materiality amount?
Lower than the materiality level for FSs as a whole
What is performance materiality used for?
Reduce risk of aggregated of uncorrected and undetected misstatements exceeds materiality for FSs as a whole
What forms the basis for audit strategy and detailed audit plan?
The risk assessment
Which assertion does review financial statement notes satisfy?
Review financial statement notes
Is materiality level included in audit plan or audit tender document?
The audit plan
What does an audit engagement letter do?
Outlines the terms and scope of the audit engagement
What procedures are usually done in an interim audit?
Analytical, tests of controls, updating risk assessments, substantive testing of transactions
What procedures are done in a final audit?
Detailed substantive testing of year-end balances are conducted. Finishing tests of control and substantive procedures
Are internal auditors separately liable for any material misstatements?
NO
How long must audit files be kept?
For five years
Is it acceptable to make administrative changes to an audit file after 60 day period?
Yes, but not procedural changes
Who designs the internal controls?
Governance, not auditors
An example of segragation in internal controls?
Tasks of taking orders, recording sales and receiving payment is allocated to three different staff members
is it acceptable to prepare and audit the financial statements of a listed company?
No, as it is a self-review threat
The request that the former engagement partner attends audit committee meetings (self-interest or familiarity threat)
Self-interest
if there’s a personal relationship between the audit engagement partner and finance director?
It is a self-interest threat
Where does audit planning stop?
Continues until the completion of the current audit engagement
Where is determining appropriate materiality level carried out?
Overall audit strategy
Why can a prior year audit file not be a useful source of information?
System may have changed in the intervening period
Who does audit committee normally liaise with?
The auditors and directors
