Section A Rote (2) Flashcards
What should annual report regarding work of audit committee include? (significant)
Significant issues relating to FSs
What should annual report regarding work of audit committee include? (Effectiveness external process)
Assess independence and effectiveness of external audit process
What should annual report regarding work of audit committee include? (independence)
How auditor independence and objectivity are safeguarded, if external auditor provides non-audit services
How should NED renumeration be trated?
A set amount based on time committed
Which department does IA department report to?
The audit committee
What is a value for money audit for?
Assess economy, effectiveness and efficiency
What should IA department not do? (design)
Design and implementing internal control procedures
What should IA department not do? (transactions)
Authorising transactions and performing reconciliations
How long is cooling off period for an engagement quality reviewer for a listed company?
5 years
Is it a rule-book or conceptual framework apporach for easy to know what is allowed or not allowed?
Rule book approach
What is the ethical issue with 40% of fee for last year’s audit still outstanding?
Self-interest
When there are large outstanding fees?
Auditor’s report should not be issued until fees have been paid
Should a 40% disocunt be rejected?
Yes, as it is not a trivial amount.
Does preparing tax returns create a self-review threat?
No
Does provision of tax advice create a self-review threat?
YES
Should all employees sign a confidentialty agreement?
NO, only audit teams of each client
When is partner rotation required for listed companies>
Only when one has been in place seven years
When can payroll and bookkeeping services be provided to a non-listed audit client? (Routine)
If they are routine and mechancial in nature
When is confidentality not an issue for an audit of a listed company?
Info relates to same client and is not being provided to any other parties
What threat does a contingent fee create?
A self-interest threat
What is likely a public interest matter
When a global company and issue r elates to environmental pollution
What should be done on a board when executive directors are paid a fixed salary which increases annualy in line with inflation?
Introduce share options to align renumeration of executive directors with long-term success of the company
When is independence on the board compromised from a director? (Time served)
Served on the board for more than 9 years
Should workforce renumeration be taken into consideration when setting renumeration of executive directors?
TRUE
Should company withhold bonuses and share awards whose performance is not acceptable?
TRUE
Example of advocacy threat and tax services?
Tax services whereby company would liaise with tax authority on another company’s behalf
What doesn’t address a self-interest threat from fee levels? (Teams)
Using separate teams
When there is a legal requirement to report a bad transaction?
Overrides disclosure done by law
Which partner should take over an audit?
No ongoing relationship with company
Should a partner of a firm serve as a director of an audit client?
FUCK NO
Methods taken by management for internal audit services (design)
Designing and maintaining internal control systems
Methods taken by management for internal audit services (recommendations)
Determine which recommendations should take priority and implemented
Methods taken by management for internal audit services (setting scope internal)
Setting scope of internal audit work to be carried out
How should matters affecting independence of listed client be disclosed
Must be disclosed to TWCG of a listed client. Also request pre-issuance review
When fees from a non-listed client represent 30% of firm’s total fees for five consecutive years? (independence)
Independence is threatened
Example of a self-review threat for an auditor
Auditor responsible for auditing areas where they were responsible for
When should audit dpeartment resign from an engagement?
If there is no alternative engagement partner assigned to audit
Most appropriate reason for previous aduit firm resigned without notice and several firms have declined engagement?
Management of Mickey may have lacked integrity
Most appropriate reason if audit client is a competitor (objectivity)
Threats to objectivity and confidentiality
What must be done first for a conflict of interest in a firm?
Infrom company
What must be done last for a conflict of interest in a firm?
Perform engagement quality review
What is done after obtaining consent to act? (Safe)
Implement safeguards
Example of a self-interest threat (shares)
Receiving shares as part of his renumeration
When are contingent fees not allowable according to ACCA Code of Ethics?
Not allowed for non-assurance services provided to audit clients if fee material to firm
Does reviewing qualifications and assessing competence of applicants create a threat to objectivity?
NO
Should the board chair be appointed externally or internally?
Externally
What membership can board chair have?
Can’t sit on audit committee but can be a member of renumeration committee provided they are not the committee chair
When is independence of non-exec director compromised (employed five)
Was employed by company less than five years ago
When is independence of non-exec director compromised (shares)
Owned shares in the company within last three years
When is independence of non-exec director compromised (pension)
Receives a pension (or other renumeration not a fixed salary)
Why is a non-exec director committing to a three year contract a dsiadvantage? (re-election)
As all directors stand for re-election annually
What should annual report explain for succession and evaluation of directors? (nomination process)
Annual report should explain work of nomination committee including process for making appointments
When should performance of board chair, board and directors be evaluated according to corporate governance guidelines?
Annually
Are provisions and legal issues common with oil and gas companies?
YES
When is detection risk greater?
If there is a lack of knowledge and experience of the client
Materiality ranges for revenue?
0.5% to 1%
Profit before tax ranges for revenue?
5% to 10%
When is completeness a risk for revenue?
If revenue is lower than expected
When is cut-off and occurence a risk for revenue?
If revenue is higher than expected
Appropriate audit response for recoverability of receivables?
Review correspondence with customers
Appropriate audit response for damage to non-current assets?
Perform an impairment review to determine if an impairment charge is required
Appropriate audit response for calculating amortisation of non-current assets?
Calculating expected amortisation charge and comparing it with management’s figure
Counter for increased detection risk? (quality)
It results in increased quality management procedures such as need for an engagement quality review
When does risk of revenue cut-off occur for bonus?
Aim to maximise their current year bonus
Analytical procedures for planning stage of an audit (MM)
Assist with identification of risks of material misstatement
Analytical procedures for planning stage of an audit (transactions)
Assist in identifying unusual transactions and events
What audit test is not reasonable for valuation of inventory and receivables?
Cut-off testing
What does an increase in trade payables mean? (cash)
There are cash flow problems
What is meant by performance materiality?
Amount which reduces probability that aggregate of uncorrected and undetected misstatements exceeds materiality for FSs as a whole
What is meant by tolerable misstatement?
Maximum amount of misstatement auditor is willing to accept and still conclude that FSs are fairly stated
Appropriate audit risk relates to increase in useful of non-current assets (directors)
Discuss with directors the reason for change in useful life
Issue if returned goods have not been recorded back into inventory?
Inventory may be misstated
What needs to be done when there;s a lack of supplier statement reconciliations (misstatement)
Increased risk of misstatement of trade payables
What needs to be done when there;s a lack of supplier statement reconciliations (accrual balance)
Misstatements in the purchase accrual balance may go undetected
What needs to be done when there;s a lack of supplier statement reconciliations (substantive testing)
Increased substantive testing needs to be performed over purchases and payables
How would a sale not occurring affect the revenue balance?
It would be overstated as gross profit margin will increase
When the gross profit margin decreases?
It indicates that website sales may not be completely recorded
Is detecting material misstatements relevant for planning stage of an audit?
No
What audit strategy section is risk of MM including the risk of fraud?
Significant factors, preliminary engagement activities and knowledge gained on other engagements
What audit strategy section is use of professional scepticism?
SIgnificant factors, preliminary engagement activities
What audit strategy section is selection of audit team?
Nature, timing and extent of resources
What audit strategy section is use of automated tools and audit techniques?
Characteristics of the engagement
What happens to detection and control risk if there’s a misappropriation of assets?
Detection risk decreases as control risk is higher
Best way to go about securing segragation of duties control?
People working in the payroll department
Can internal control questionnaires and narrative notes be prepared in advance?
Internal control questionnaires
Can internal control questionnaires and narrative notes be easy to udnerstand?
Yes
Can internal control questionnaires and narrative notes overstate controls?
Just internal control questionnaires
Can internal control questionnaires and narrative notes miss controls?
Both
Is goods are counted and agreed to supplier’s delivery note before signing the delivery note to accept the goods a strength or deficiency?
Deficiency as should be agreed before signing the delivery notes
What is the benefit of reviewing a payment list?
Identifies any unusual or duplicate names
When there’s greater emphasis on internal controls, what is the trade off>
Decreased sample sizes when performing substantive testing
Do discounts received relate to purchase or sales system?
Purchase system
What should be done to increase independence of internal auditors when reporting deficiencies?
Reporting directly to board of directors not the finance director
Is tracing a transaction through system to ensure it is recorded in detailed sales listing test of control or substantive procedure?
Substantive procedure of completeness
Difference between general and information processing?
General: Covers everything
Information processing: More specific
When a control is a computerised control?
Can be used to place a dummy sales order
What can’t the auditor simply assume with the presence of an audit committee?
Work of the internal auditor will be reliable, must assess the work to ensure it is appropriate for audit purposes
What type of control is internal audit department agrees the physical assets to the asset register to ensure completeness?
Reconciliation
What type of control is variances between actual and budgeted expenditure are analysed in quarterly management accounts?
Verification
What is persuasive evidence assets purchased during the year have been authorised?
Requisition
Order
Minutes of asset expenditure committee meetings
When there;s a comparison of actual to budget. Is it a test of control or a substantive procedure?
A substantive procedure
When an internal audit employee wants to provide direct assistance with external audit procedures?
Do what doesn’t require significant judgement (e.g. cash counts)
When a supplier has a low balance at year-end but with a high volume of transactions during the year. What does this indicate?
That not all liabilities have been recorded at year-end date
When there’s a liability to pay for goods at the date of receipt?
An accrual should be created for goods received but not yet received
Are accruals recorded separately from trade payables?
YES
What is most reliable evidence in accuracy of wages and salaries calculation?
Proof-in-total calculation
What procedure does a proof-in-total relate to?
A substantive procedure
What substantive procedure does review the treatment of a sample of post-year-end returns relate to?
Occurrence
What substantive procedure does select a sample of GDNs and agree to invoices in detailed sales listing relate to?
Completeness
What substantive procedure does select a sample of invoices from the detailed sales listing and agree to GDNs relate to?
Occurrence
What substantive procedure does select a sample of invoicess and recalculate the invoiced amount agreeing to price list?
Accuracy
What shouldn’t be done when completeness is the key assertion for trade payables testing?
Suppliers where the statement agrees to the balance on the list of individual suppliers
How to determine whether a payables balance is understated? (GRN)
Use GRN to determine when the goods were received
Which documents need to be examined to confirm trade payables balance?
Inspect pre-year-end GRN
Inspect post-year-end bank ledger
Is it appropriate to project a one-off error across the popuilation?
NO, as it is not representative of the population
What is meant by test data?
Inputting dummy transactions into the client’s system to test how the transactions are processed
When is it most beneficial to review post-year-end receipts?
Confirms actual recoverability of outstanding balance, therefore provides the most reliable evidence
What substantive procedure does performing a receivables circularisation relate to?
Existence
What substantive procedure does reviewing post-year-end cash receipts from customers?
Existence
What is the result of a decrease in selling price?
May result in cost of inventory being higher than NRV
When an inventory turnover decreases (valuation)
It indicates valuation issues
What is the effect of inclusion of third-party inventory?
Overstates inventory quantities but not overvaluation
Ins inspecting the inventory for evidence of damage test of control or substantive procedure?
Substantive procedure
Audit responce to a lawsuit? (inspect)
Inspect correspondence between client and their legal advisors
Audit responce to a lawsuit? (review)
Review board minutes to understand management’s view about the claim
When must an external auditor attend an inventory count?
If inventory is a material balance
Primary reason for maintaining an inventory count timetable for the perpetual inventory counting system?
Ensure all areas are counted during the year
What procedure does agreeing the items listed on the count sheets to the physical inventory confirm?
Existence
What procedure does agreeing the physical inventory quantities to the count sheet confirm?
Completeness
Should the external auditors attend at least one count?
Yes, to ensure adequate controls are applied
When the team prints inventory quantities from system and these records are then compared to the inventory physically present a strength or deficiency?
Deficiency
Should all lines of inventory be counted at least twice in a year?
It is not necessary
Do external auditors need to request a surprise inventory count?
False
When should sampling be used (Appropriateness)
Appropriateness of the population
When should sampling be used (Size)
Size of the population
When should sampling be used (Completeness)
Completeness of the population
What does sampling always have to be?
RANDOM
What is meanr by a systematic sampling?
Where a sample is chosen with a constant interval
Is assertion of occurence relevant to payables or purchases
Just purchases
What is meant by client generated evidence?
Individual supplier balances
Accruals listing
Bank ledger account
GRNs
Priority of third-party generated evidence or client generated evidence?
Third party takes priority
What should be done if several misstatements have been found?
Increase the amount of testing
When direct evidence can’t be obtained, what is the issue?
Difficult to determine why the errors occurred
Can audit software slow systems down?
YES
What year is an audit more costly to setup?
In the initial year
Issue if an audit partner advises which accounting system to choose?
It is a self-review threat
What must audit firm do when a new computerised accounting system is implemented?
Audit firm should dealy use of audit software to ensure designed to effectively work with the new system
