Section A Rote (4) Flashcards
What is an objective of conducting an audit of FSs?
To report on FSs and communicate as required by ISAs in accordance with auditor’s findings
What is an agency? (Shareholders directors)
Shareholders entrust the directors to manage the running of the business
Is an assurance report included in an assurance engagement?
Yes
Is a commitment to competence in an assurance engagement?
No
Is an ethical requirements in an assurance engagement?
No
Does a limited assurance engagement provide a full understanding of the entity and its environment?
NO
Is performing tests of controls to understand the controls in a limited or reasonable assurance engagement?
A reasonable engagement
Does using a separate team of staff reduce risk of firm taking on management responsibility?
No, as it may reduce any potential self-review threat
What is included in course on external audit regulation?
ACCA code of ethics
Companies legislation
ISA
Not IFRS
Is receiving notice of a general meeting a right of auditors?
Yes
Is to be in attendance and be heard at all board meetings a right of auditors?
No
Inherent limiation of audit (reporting)
The nature of financial reporting
Inherent limiation of audit (audit)
The nature of audit procedures
Inherent limiation of audit (cost)
Need for the audit to be conducted within a reasonable period of time and at a reasonable cost
Can IFAC member bodies adopt ISAs?
Yes
Can ISAs be modified by countries?
Yes
Can ISAs override national standards and regulations for external audits?
They can’t
Does complying with ISAs ensure compliance with national standards?
False
Which committee is responsible for decisions regarding the appointment and renumeration of executives?
Responsibility of a nominations committee
Should an audit committee contain executive directors?
NO
What threat does providing a non-assurance service create?
A self-interest threat due to fee income
What threat does a significant part of internal controls over financial reporting create?
A self-review threat
What is the expectation gap? (Expectations role auditor)
Relates to expectations of shareholders and general public about the role of the auditor
Should a member of the committee have worked in a relevant industry to the company they are auditing?
Yes
Issue of having too much financial assurance responsibility handled in an audit committee (full board)
Full board may abdicate its responsibilities to the audit committee
Issue of having too much financial assurance responsibility handled in an audit committee (directors not)
Directors who are not audit committee members may not full grasp major accounting or risk issues
What is the threat when an audit senior of Jones & Co has been on secondment as the financial controller of LVF and is part of the current audit team?
Familiarity and self-review
When an auditor has worked on some related schedules?
He should be removed from the audit team to ensure that independence is not threatened
What should be done for an unpaid fee still outstanding for last year’s audit?
Agree a payment schedule
Titania Co, a listed company, will also require Jones & Co to prepare the financial statements. Should audit engagement be accepted or declined?
Declined because of self-review threat
The finance director of Puck Co, an unlisted company, is the brother of one of the partners of Jones & Co. Should audit engagement be accepted or declined?
Accept, with safeguards
ArchRise Co which plans to go public in the next two years. Should audit engagement be accepted or declined?
Accept
What is the threat for the request for help in recruiting a new non-executive director?
Self-review threat
When is resig nation of the audit firm necessary?
If safeguards could not reduce the threat to an acceptable level
If a family member of the engagement partner owned the financial interest and refused to dispose of it. What is the appropriate response?
Resignation
When is there no need to resign (acceptable level)
Risks can be reduced to an acceptable level through applciation of safeguards
Should non-executive chairman decide on renumeration of all directors?
False
Should all directors receive induction training on joining the board?
True
What should be done when there’s a breach of confidentiality?
Inform those charged with governance of company as soon as possible
When choosing someone to take over as audit engagement partner, what is the most important factor?
Whether they have any ties with the company
When safeguards can’t be reduced to an acceptable level?
Auditor should resign
What is meant by management responsibilities?
Controlling
Leading
Directing
When company is a public interest entity and audit fees have exceeded 15% of total fees for two years. How should this be disclosed?
To those charged with governance and an appropriate safeguard should be implemented
What threat is an audit junior receiving investment advice?
It is a threat to independence
When someone is a key audit partner for longer than 7 years?
They should be removed from the audit team
What must be considered for when tax advisory service engagement can be accepted (supported law)
Extent to which the advice will be supported by tax law or regulation
What must be considered for when tax advisory service engagement can be accepted (material financial)
Extent to which the outcome of the tax advice will have a material effect on the FSs
What should happen with the contingent fee basis for taxation service s?
Must be rejected
Where taxation services involve acting as an advocate for an audit client before a court in the resolution of a tax matter that is material to the financial statements? (What is the threat)
Advocacy threat created would be so significant that no safeguards could eliminate or reduce the threat to an acceptable level
When is someting a test of control?
They concern the operating effectiveness of controls
When should interim substantive procedures only be performed?
When risk of material misstatement is low
When is a company liable for the future to find a fraud?
If indications of a possible fraud were found but were dismissed as immaterial due to inadequate investigation
How should purchase invoices be numbered?
Sequentially, not based on a supplier code
What should the finance director only be responsible for in a purchase ordering department?
For authorising payments
Should authorisation of transactions be segragated?
Yes
Should preparation of financial statements be segragated?
No
Should custody or handling of assets be segragated?
Yes
Should budgetary control be segragated?
No
Should recording of transactions be segragated?
Yes
Should the internal audit judge the company’s objectives of the board’s strategies to achieve those objectives?
No
Is an internal audit department required to be independent?
No, possibility of being outsourced
How does internal audit determine benchmarks?
Through value for money
Does holding obsolete inventory result in any difference?
It could result in higher physical differences
Is internal audit responsible for reviewing employees eligibility for promotions?
NO
Inspect plant and equipment at the factory at the reporting date satisfies which assertion?
Existence
Review repairs and maintenance expenditure accounts for asset expenditure satisfies which assertion?
Completeness
For disposals, agree proceeds to sales invoices and cash book receipts satisfies which assertion?
Accuracy and valuation
Examine purchase invoices for evidence of ownership of material items of plant and equipment satisfies which assertion?
Rights
Sampling goods received notes and goods despatch notes satisfies which assertion in inventory?
Cut-off
What do recognised measurement techniques and a short forecast period decrease?
The lack of precision
Does an auditor’s professional judgment have no bearing on the degree of estimation uncertainty?
No
Does evidence in written representation need to be put in writing?
Yes
Where is management’s response to deficiencies in internal control detailed?
In communication with deficiencies in internal control
There were no irregularities involving management or employees that could have a material effect on the financial statements. Where is this shown?
Written representation
B.All books of account and supporting documents have been made available to the auditor. Where is this shown?
Written representation
Adjustments and disclosures of events subsequent to the date of the financial statements have been made. Where is this shown?
Written representation
What is the basis for seeking written representation?
Ensure that the directors formally accept their responsibility for providing such information to the auditor
What may signify a risk in going concern? (Management)
Numerous changes of key management
How should amangement assess going concern?
Take into account all available information about the future, even though there is inherent uncertainty related to future events or conditions
Where to report a going oncern for a listed entity?
Key audit matters
Waht is a mitigating factor when assessing ability to continue as a going cocnern?
Postponement of research and development expenditure
Audit opniion for when company determines that a material uncertainty exists that may cast doubts on Mulberry Co’s ability to continue as a going concern. (Appropriately disclosed)
Unmodified with a separate going concern section
Audit opniion for when company determines that a material uncertainty exists that may cast doubts on Mulberry Co’s ability to continue as a going concern. (Not disclosed)
Qualified “except for” or adverse
When is revenue relevant to a valuation of inventories?
It is never relevant
What should happen with accounting estimates such as useful lives of assets?
Must be reviewed regularly and depreciation adjusted where there is a change in useful life
Is tehre a statement of responsibility in an unmodified opinion?
No
Is reviewing the adequacy of the disclosure of accounting policies part of the auditor’s overall review of the FSs?
Yes
When shares are issued after year-end. Is it an adjusting or non-adjusting event?
Non-adjusting
What opinion is given for It is probable that the government agency will win the case, but as the letter was received after the year end, the directors do not plan to account for or disclose it in the financial statements?
Qualified
What opinion is given for it is possible but not probable that the government agency will win the case; therefore, the directors have disclosed the matter in the financial statements
Unmodified opinion with emphasis of matter
When must date of written representation be made?
As near as practicable to, but not after the date of the auditor’s report
If the expert’s work is not competent, reliable, or independent/
Auditor can’t rely on it
Does management give a conclusion on the use of the going concern basis of accounting
No, it is the auditor’s responsibility
How important is availability and experience of audit team members for level of testing?
Not important
Does auditor adjust financial statements?
No, management does
What assertion is inspect a sample of despatches of goods to customers during the year and agree the number of containers to container records
Accuracy (quantities have been recorded appropriately)
What assertion is inspect a sample of containers on hand during the year-end inventory count?
Existence (the containers physically exist)
What assertion is trace a sample of containers held by customers at the year end to container records showing that the containers were returned after the year end?
Rights (that company controls the right to the containers)
What assertion is trace a sample of invoices for new containers purchased during the year to the container records?
Completeness (purchases that should have been recorded have been recorded)
What is most valuable evidence for investment in an unquoted company?
Dividend income agreed to the bank statement by a member of the audit team
What is 2nd most valuable evidence for investment in an unquoted company?
Inspection of share certificates by internal audit
Can research costs be capitalised for IAS 38?
No, only development costs
What opinion do I give if I am not able to apply alternative procedures to verify the existence of the inventory?
Qualified opinion due to inability to obtain sufficient appropriate audit evidence
What is affected on carrying amount of assets if assets included in the register don’t exist? (overstatement or understatement)
Assets are overstated
What if an asset is impaired but impairment loss has not been recognised? (overstatement or understatement)
Assets are overstated
What is the direction of testing for overstatement?
What is recognised in the financial statements to source documents or assets
What is the direction of testing for understatement?
From source documents to the financial statements
What assertion does “agree a sample of additions recorded in the non-current asset register to the cash book and purchase invoice ensuring that the purchase date is accurate and it is recorded at the correct amount” test?
Existence, accuracy and valuation
What assertion is not satisfied when comparison is based on totals?
Does not provide evidence relating to classification
What must an uditor do for an expert who is management’s expert?
Auditor must evaluate the expert’s objectivity and competence and capabilities
When there’s a high reliance on controls? (procedures)
Reduced substantive procedures
Are existence and rights and obligations related to IS items?
No, just BS items
When there’s a low volume of transactions for revenue, how should it be approached?
A substantive approach
What approach is an auditor unlikely to perform on an interim date?
Perform tests of controls
What is test for completeness for revenue for (understatement or overstatement)
Understatement
Recalculation of a sample of inventory value calculations and count sheet castings satisfies for each assertion?
Accuracy
Wht do confirmations need to be positive confirmation>
Because the risk of material misstatement is high due to misstatements revealed in the prior year, the number of customers with high balances and the deficiencies in internal control
How should test of any understatement of receivables at year end be?
The auditor should compare goods despatch notes shortly before the year end with the sales ledger.
Understatement sequence?
From source document to FSs
Sales orders cycle?
Sales order => Goods despatch => Sales invoice => Sales ledger
What if the client refuses permission for a customer to be sent a confirmation request?
Search for alternative evidence and “ask why”
What should be done if a major customer has responded with a statement that shows disagreement with the balance?
Agree invoices not included in the customer’s statement to despatch notes raised before the year end
What procedure should be if another major customer has responded that it cannot confirm the amount owed due to the form in which it keeps its accounting records?
Examine cash receipts received from the customer after the year end
What type of audit procedure is tested for perform a cash count for comparison with the results of the cash count conducted by a company?
Reperformance
What is audit evidence obtained by an auditor more reliable than?
Audit evidence obtained indirectly or by inference
Which audit evidence is the most reliable?
An independent external source is more reliable than internal
What is done when a client has restricted the auditor’s ability to obtain evidence?
Would be appropriate to re-evaluate risk and revise the audit plan accordingly to determine whether sufficient appropriate evidence can be obtained by alternative means
When customer payments of 700 - cheques of 300 not posted until after year end?
400 is overstated
What assertion does watching a process relate to?
Observation
What assertion is obtaining a bank letter relate to?
Confirmation
What assertion is comparing year-end balances?
Analytical procedures
What does receiving the bank confirmation letter via a client do to audit evidence>
Reduces reliability as evidence not obtained from a 3rd party
Which audit procedures would provide the best evidence to verify accrued interest at the accounting period end?
Recalculate the accrued interest based on the outstanding loan value, interest rate and accrual period
Which audit procedure is msot useful for audit programme tests for existence of bank and cash?
Attend the cash count at the year end and reperform the count
What does the accuracy, valuatioon and allocation assertion mean?
Assets, liabilities and equity are included in the financial statements at appropriate amounts
Any valuation or allocation adjustments have been appropriately recorded
Related disclosures have been appropriately measured and described
Should an auditor facilitate negotiaitons between two companies?
No
When should auditors not resign from an audit during an engagement?
Both companies are aware of the situation and do not object
When the outcome of the negotiations with Pudco is a future event that is not wholly within the control of Tourex’s management?
Disclosed as a contingent asset
When a company is not disputing liability to the guests?
A provision is recognised
What opinion is issued when there’s a lack of evidence as lawyers refuse to provide a confirmation related to the legal negotiations (not pervasive)
Qualified
What is a high risk in relation to the COMPLETENESS of the liability recorded at the year end?
A supplier with a low balance at the year end and with a high volume of transactions during the year
What is appropriate action for an invoice was received shortly after the year end in accordance with the agreement?
The auditor should request that an accrual is created in respect of the goods received
Are accruals recorded separately from individual supplier balances?
Yes, so they can’t confirm the completeness of supplier balances
Earliest for finalisation of an audit?
End of the reporting period
What is done after end of the reporting period
Audit fieldwork completed
What is done after audit fieldwork is completed?
FSs authorised
What is done after FSs authorised?
Subsequent events review completed
What is done after subsequent events review completed?
Auditor’s report issued
What is done after auditor’s report issued?
FSs issued
Ways to confirm revenue?
Examine alternative records which detail revenue and perform anayltical procedures
When an auditor is unable to obtain sufficient appropriate evidence about revenue and receivables balance? What is the opinion given
Qualified to the effect that except for the revenue and receivables balances the financial statements are fairly presented
When there is no need for the auditor to ask the lenders for confirmation?
Since cash book payments against payment schedules will confirm this
When is undertaking a review of subsequent events to identify whether any adjustment or disclosure is required in the financial statements done?
When reviewing subsequent events occurring between the date of the financial statements and the date of the auditor’s report
What should auditor do for all misstatements that arise over the course of the audit?
Misstatements should all be accumulated and should be communicated TCWG on a timely basis
Is 1.9% of profit before tax considered material?
NO
What is done after a subsequent event?
Discuss management’s refusal to adjust the financial statements with those charged with governance
What if an event occurs after the financial statements are issued?
The auditor has already signed the auditor’s report and so is not able to now include a qualified opinion.
Does recalculating the allowance provide any evidence regarding the need to write down or write off the receivable?
No
What should be done if a company makes an amendment to their FSs?
The auditor should issue an unmodified opinion in the new auditor’s report
What if an event provides further evidence of conditions existing at end of period?
It is an adjusting event
When should inventory be written down?
When the misstatement is material
What is reliable audit evidence regarding the valuation of the inventory damaged by the explosion procedure?
Recalculate its cost using year-end inventory count quantities and production costing records
Should a non-adjusting event be written off?
No
IS 16% of profit before tax considered material?
YES
