Section A Rote (5) Flashcards
What is a conclusion expressed in negative terms?
Nothing has come to our attention. Therefore assurance ois limited
When there’s limited assurance, how is an opinion expressed?
Negatively
What level of assurance would normally be given to an audit of financial statements?
Reasonable assurance
What level of assurance to a review of financial statements
Limited assurance
What is professional scepticism?
To apply a questioning mind to information and evidence
Who is ultimately responsible for ensuring that the annual financial statements of a listed company are prepared in accordance with IFRS and relevant legislation?
The board of directors
What is the objective of an audit of financial statements of a company?
To provide assurance on credibility of the financial statements
How are ISAs issued?
By IAASB
Can ISAs override local legislation?
NO
Who approves the appointment of a company’s auditor?
The shareholders
The International Auditing and Assurance Standards Board (IAASB) is a standard-setting board of which of the following?
International Federation of Accountants
Is having access to the company’s books, accounts and records a generally accepted right of an auditor
Yes
Is to require from company officials any information and explanations on any matter whatsoever a generally accepted right of an auditor?
No
Is to report to any legal authority any matter the auditor considers that authority needs to know a generally accepted right of an auditor?
No
Is to attend any board or committee meeting a generally accepted right of an auditor?
No
Is only a statutory auditor is allowed to carry out audits of companies?
Yes, in most jurisdictions
Should all ISAs be applied in the course of an audit?
No
What do ISAs require auditors?
To use their professional judgment when applying them not merely follow rules.
Is auditor’s accountability and remuneration a principle of corporate governance?
No
Is rights of shareholders a principle of corporate governance?
Yes
Is board responsibilities a principle of corporate governance?
Yes
Is risk management and internal control a principle of corporate governance?
Yes
Is there should be a clear division of responsibilities between the leadership of the board and the leadership of the company’s business a provision of UK corporate governance code?
Yes
Is all members of the board, excluding the chairman, should be independent non-executive directors a provision of UK corporate governance code?
No
Is executive director remuneration should be linked to corporate and individual performance a provision of UK corporate governance code?
Yes
Is all directors should be subject to annual re-election a provision of UK corporate governance code?
Yes
Who do audit committees normally liaise between?
The auditors and the directors
Who has ultimate responsibility for a company’s risk management and system of internal control?
The board of directors
What is the threat when the total fees from an audit client represent a large proportion of the firm’s total fees?
Dependence on that client and concern about losing it create a self-interest or intimidation threat
What is done when the fee level represents, or is likely to represent, more than 15% for two consecutive years? (issuance)
Determine whether a “pre-issuance review” might be a safeguard to reduce the threats to an acceptable level
What is the benchmark for a fee being considered a self-interest or intimidation threat for public interest entities?
15%
Should an auditor make a voluntary disclosure if an auditor knows or suspects his client is engaged in money laundering?
Yes
Should an auditor make a voluntary disclosure where disclosure is made to non-governmental bodies?
No
Should an auditor make a voluntary disclosure where it is in the public interest to disclose?
No
Should an auditor make a voluntary if an auditor suspects his client has committed terrorist offenses?
Yes
Accepting gifts could be considered to present which of the following threats?
Accepting gifts could indicate a self-interest threat, a familiarity threat, and/or an intimidation threat.
When will an action taken by a professional accountant only be considered a safeguard?
If it is effective
Is seeking advice from a third party a safeguard?
Yes
What is meant by independence of mind?
The state of mind permits the expression of a conclusion without being affected by influences that compromise professional judgment; and allows an individual to act with integrity and exercise objectivity and professional scepticism
Is assuring the ability and competence of the individual to carry out the work an example of independence of mind?
No
Is allowing an individual to act with integrity an example of independence of mind?
Yes
Is allowing an individual to exercise objectivity and professional scepticism an example of independence of mind?
Yes
Is permitting the expression of a conclusion without being affected by influences that compromise professional judgme
Yes
If a potential client has asked a firm to act as auditor to his company and want the audit to commence immediately as the financial statements are required by the bank? What should the auditor’s response be?
Contact the previous auditors for professional clearance before they start work
Should objective and scope of the audit be included in an audit engagement letter?
Yes
Should results of previous audits be included in an audit engagement letter?
No
Should management’s repsonsibilities be included in an audit engagement letter?
Yes
Should need to maintain professional scepticism be included in an audit engagement letter?
No
Is a review of the potential client’s commitment to internal controls part of the client screening process?
Yes
Is an assessment of the apparent integrity of the management of the potential client part of the client screening process?
Yes
Is establishing whether any conflict of interest exists part of the client screening process?
Yes
Is carrying out a full background check of the employees of the potential client part of the client screening process?
No
Should auditor revise terms of audit engagement if there has been a change of senior management at the client company?
Yes
Should auditor revise terms of audit engagement if new regulations have come into force which have direct implications for the client’s business practices?
Yes
Should auditor revise terms of audit engagement if the client has opened a second branch in a new location overseas?
Yes
What is meant by transfer information? (copy accounts and TB)
A copy of the last set of accounts and a detailed trial balance that supports those accounts
Does a copy of the last set of financial statements formally approved by the client part of transfer information?
Yes
Does a detailed trial balance that is in agreement with the financial statementst part of transfer information?
Yes
Does a working papers relating to the most recent audit of the client part of transfer information?
No
What is the advantage of using standardised working papers? (standard documentation audit)
Introduces a standard approach to the conduct and documentation of the audit
What is more likely to appear on the permanent audit file as opposed to the current audit file?
Engagement letter
How long does the ACCA recommend that audit working papers be retained?
A minimum of 7 years
Should audit working papers provide evidence that the financial statements of the client are correct?
No
Should audit working papers hold audit team accountable, assist in planning of audit and facilitate supervision and review of audit work?
Yes
Who do audit working papers belong to?
The auditor and are confidential
Does the client have the right to demand access to audit working papers?
NO
What can client require auditor to do (in relation to ownership of audit documentation)? (disclose third)
Require the auditor to disclose documents to third parties, only if the documents in question belong only to the client.
What is an audit programme? (instructions audit staff)
A clear set of detailed instructions on the work to be carried out by audit staff
What is an an internal control questionnaire? (detailed questions characteristics internal control)
A series of detailed questions to ascertain and evaluate all important characteristics of the system of internal control in operation
What is an IFRS/disclosure checklist? (disclosure compliance IFRS)
A list of disclosure and other requirements which must be met in order to ensure compliance with IFRS, statutes and listing rules
What is an audit manual?
A list of general instructions on the audit firm’s methods of auditing in each area and the firm’s general procedures
What can adequate audit planning not provide? (material misstatement)
Any assurance concerning the risk of the existence of material misstatement in a set of financial statements
What does audit strategy do?
Sets the scope, timing and direction of the audit.
What should auditor consider when developing an overall audit strategy? (evaluations materiality risk controls)
Preliminary evaluations of materiality, audit risk and internal control
What is the time frame of audit planning?
Begins shortly after the completion of the previous audit and continues until the completion of the current audit engagement.
What does performing preliminary engagement activities help ensure?
Auditor has considered events or circumstances which may adversely affect his ability to perform the audit engagement
Where is determining appropriate materiality levels carried out?
As part of the overall audit strategy, which sets the scope, timing and direction of the audit.
Is the company’s systems procedure manuals a best source of information about a company’s financial systems?
Yes
Is the internal audit function’s system notes a best source of information about a company’s financial systems?
Yes
Is the prior year audit file a best source of information about a company’s financial systems?
No, as system may have changed in intervening period
Is the Inquiries made of company staff a best source of information about a company’s financial systems?
Yes
When an audit client is a hi-tech company that has financial problems, a dominant chief executive, poor internal control and unusual transactions. What is the issue?
Increased audit risk
What is not a qualitative inherent risk factor?
Materiality
What should happen if inherent and control risk is high (detection and substantive procedures)
Low detection level and increased substantive procedures
Risks close to the upper end of the spectrum of inherent risk are known as?
Significant risks
What type of activity is the preparation of reconciliations?
Control activity
How to reconciliations link to monitoring process? (timely basis)
Management’s review to ensure reconciliations are prepared on a timely basis is an activity in the monitoring process
What is an advantage of using systems flowcharts to document internal controls
Flowcharts provide a visual depiction of a client’s activities.
What does an ICQ document?
Understanding of the design of the system of internal control
What are tests of controls required to assess?
Control risk
Effectiveness of the control environment
Comparing two or more items with each other is an example of which control activity?
Verification
What are inherent limitations of internal control? (Collusion, human error)
Collusion of two or more people
Human error
Management override
Why should the director’s loan from the company be tested?
As it is a statutory requirement to disclose the exact amount
What should be done for any balance/class of transaction greater than the performance materiality level?
Must be tested
What action should be taken for
”
As an audit team member with two years of experience, you were assigned to carry out a test of details on directors’ expenses. The result of the test showed that in several cases involving the same director, the Chief Financial Officer (CFO) had authorised the over payment of his expenses. Each expense item was less than the performance materiality level.
“
Discuss with senior member of the audit team, because of the potential fraudulent transactions
What is a material item?
Its omission or misstatement could influence the decisions of primary users of the finance statements
What happens to items that fall below the materiality threshold>
Can’t be completely ignored and auditor must use judgment in dealing with such items (sampling or analytical procedures)
What is an appropriate starting point for determining maeriality for a property development company?
Assets
What does reviewing ICQ provide?
Information about control policies and procedures
Can ICQ provide information about actual transactions or events?
No, so unlikely to uncover non-compliance with laws and regulations.
Who should an auditor report this situation to?
”
An auditor has discovered a $1 million wages fraud by a director of a listed company. The amount is not material in relation to the company’s financial statements and the auditor has determined that the fraud does not constitute money laundering
“
To those charged with governance
Who is primary responsibile for detection of fraud?
Management and TCWG
What is the external auditor’s responsibility? (reasonable)
Obtain reasonable assurance that the financial statements are free from material misstatement
What is the internal auditor’s responsibiltiy?
The evaluation of risks based on audit plans and appropriate testing and must be alert to the signs and possibilities of fraud and error
Should internal auditors design internal controls?
No
How can internal auditors assist management?
Assist management through assessing the design of the internal controls to detect fraud and error and making recommendations for improvement.
What indicates an opportunity to commit fraud? (investors)
High expectations of investors
Is deprovisionising an access control?
Yes
Is the sales department matches a list of computer-generated invoices to copies of the manual input documents from which invoices are originated an information processing or general IT control?
Information processing
Is the personnel department reviews a monthly printout of all changes to payroll standing data which is then checked against manual records an information processing or general IT control?
Information processing
Is the sales system includes a sequence check on pre-numbered sales input documents received from the sales department an information processing or general IT control?
Information processing
Is the access to the computer network is authenticated through unique user IDs and passwords an information processing or general IT control?
General IT controls
What must a control for ensuring purchases aren’t understated include?
Must include validating that all goods received have been invoiced
Does a control for invoices are authorised as matched with goods/services received notes before being recorded in the detailed purchases listing test for understatement or overstatement?
Overstatement
Which audit procedure does this relate to?
”
During the current year audit, the auditor tests a control by completing certain procedures that were done by the client as part of the internal control over the given transaction cycle.
“
Reperformance
When is the risk of material misstatement misstatement the same as inherent risk?
When the auditor does not intend to rely on the operating effectiveness of controls
What is done when evidence for a substantive audit test may not be available?
Auditor will need to place greater reliance on tests of internal controls related to the IT system
How should all significant deficiencies and other matters that are deemed of sufficient importance?
Should be reported to TCWG
When is a lack of sensitivity analysis only be significant?
If the accounting estimates were particularly subjective or complex rather than routine
Is an indication of areas in which the client can assist in improving audit efficiency included in the report to management?
Yes
Is constructive feedback on business systems, risk systems and risk management included in the report to management?
Yes
Are details of the audit work carried out to detect deficiencies included in the report to management?
No
Are details of additional extensive work that could have been carried out to try to detect further significant deficiencies included in the report to management?
No
How should all deficiencies identified as significant be communicated>
In writing to TCWG
How can the auditor ordinarily disclose any details of significant deficiencies? (Client)
Client managememt
Is unnecessary spending considered to be within the scope of a value for money (VFM) audit?
Yes
Is revenue opportunities considered to be within the scope of a value for money (VFM) audit?
Yes
Is financial reporting controls considered to be within the scope of a value for money (VFM) audit?
No
Is protection of assets considered to be within the scope of a value for money (VFM) audit?
Yes
Are companies required to implement and maintain an IA function?
Yes
Should IA report to the finance director?
No
Appointed by the audit committee relevant to external or internal audit?
Internal
Reports are publicly available to shareholders relevant to external or internal audit?
External
Review efficiency and effectiveness of operations to improve operations relevant to external or internal audit?
Internal
Express an opinion on the financial statements relevant to external or internal audit?
External
What is a value for money audit?
It is focused on assessing the economy, efficiency and effectiveness of asset expenditure
Who determines the scope of work of internal auditor?
Audit committee
Which of the following would increase this risk, and so indicate that more evidence should be collected for “sufficiency”? (deadline year end)
A reporting deadline which is sooner after the year end than usual
What is needed when auditing a highly automated system
Increased need for tests of control, as subtantive tests of details alone won’t cut it
Which procedure does the below test?
”
the auditor selects a sample of payment vouchers and compares the dates on the vouchers to the dates the transactions were recorded in the purchase journal.
“
Cut-off
Comparing the date of purchase transactions to the dates they were recorded is an example of what assertion?
A cut-off test
What procedure isn’t tested on an BS item?
Cut-off
What is recalculation?
Check on the mathematical accuracy of documents or records
What is observation?
Looking at a procedure or process being performed by others
What is enquiry?
Obtain information of knowledgeable persons, within the company or outside the company
What is reperformance?
Auditor’s independent execution of procedures or controls which were originally performed as part of the entity’s internal control
