Section A Rote (6) Flashcards
What is mostlikely to detect for (misallocation distribution)
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An auditor reviews the revenues and expenses in the detailed profit and loss account of a company and investigates significant variations in comparison with the equivalent figures for the previous year.
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The misallocation of distribution costs as advertising expenses
Is it possible to compare mark up with gross profit directly?
No
When a fixed mark-up of 50% on cost whilst there is also a gross profit margin of 40% of sales mean?
Some purchases have not been recorded
When must analytical procedures be used?
In risk assessment (at the planning stage) and in forming an overall conclusion (review stage)
What do substantive analytical procedures depend on? (Auditor judgment evidence)
Auditor’s professional judgment regarding the sufficiency and reliability of the evidence they can provide.
How is receivables collection period calculated?
Trade receivables (year-end or an average of opening and closing)/Credit sales × 365
What can cause an increase in the receivable collection period? (Revenue customer)
Monthly revenue doubled in June 20X5 due to sales to a new credit customer
What must be done when evaluating accounting estimates for reasonableness? (Develop Independent expectation estimate)
The auditor may develop an independent expectation of the estimates or test the calculation of the estimates
What is estimation uncertainty in relation to an accounting estimate? (Risk measurement)
Susceptibility to an inherent lack of precision in measurement
What is management bias?
A lack of neutrality by management in the preparation of information
What is an accounting estimkate?
An approximation in the absence of a precise means of measurement
What increases the risk of misstatement in an accounting estimate? (Data)
Insufficient relevant data and degree of uncertainty associated with assumptions
What should be the auditor’s concern regarding accounting estimates? (Reasonableness)
The reasonableness of accounting estimates and the adequacy of related disclosure
What is the purpose of developing an auditor’s point estimate or range? (Eval)
To evaluate management’s estimate
What is appropriate for developing an auditor’s estimate of an accounting estimate? (different model)
Using a different model to the one used by management
What is appropriate for developing an auditor’s estimate of an accounting estimate? (expert)
Employing an expert to develop a suitable alternative model
What if the appraiser is not independent of the client?
The auditor may still be able to use the appraiser’s work
Does auditor make reference to an expert in an unmodified opinion?
No
Does auditor make reference to an expert in an modified opinion?
Make reference to the expert in a modified opinion to explain the nature of the modification
Does auditor need permission from expert before referencing the expert in the report?
Yes
How do internal auditors’ work affect procedures?
May affect the nature, timing, and extent of audit procedures in obtaining an understanding of internal control, assessing risk and performing substantive procedures
Where does auditor have ultimate responsibility? (FS)
Express an opinion on FS
Can internal auditor provide external auditor with direct assistance?
No if there’s a significant threat to their objectivity or lacks competence
Does a bias towards large balances for receivables aimed at detecting understatement/overstatement
Overstatement
Is the higher the inherent risk the greater the sample size?
True
What does population size affect? (Decision sample)
The decision to sample rather than the size of the sample
How to minimise the risk of an error going undetected by the auditor? (Sample)
A large sample size must be tested
When there;s a higher the tolerable misstatement (sample size)
The lower the sample size
When there’s more likely an error (sample size)
The sample size should be larger
When the population is more stratified (sample size)
The lower the sample size
What are value weighted selection unlikely to detect (overstatement/understatement)
Understatement
What can value weighted selection detect? (errors overstatement)
Detect systematic errors but only those leading to overstatement
What must monetary unit sampling (MUS) detect? (Higher Values)
The higher values rather than the lower
When will an auditor consider the broader implications of a deviation?
If it was initially concealed by a forged document
What is a sampling risk?
The risk that the conclusion based on a sample may differ from the conclusion on the entire population
What is the purpose of obtaining written representations from management?
To confirm management’s belief that it has fulfilled its responsibility for the preparation of the financial statements
Where would details of any material subsequent events or confirmation that there were none be included? (Report)
In a report to management
Where would confirmation of management’s belief that it has fulfilled its responsibility for the completeness of the information provided to the auditor be included?
An engagement letter
When accounting records are unavailable (written representation)
It is not acceptable to obtain a written representation as this represents an inability to obtain sufficient and appropriate audit evidence and if material would result in a modified audit opinion
Are written representations sufficient appropriate audit evidence for most audit assertions?
No
When should the date of written representation be?
As near as practicable to, but not later than, the date of the auditor’s report
Where should written representations cover?
Written representations should cover all the financial statements and periods referred to in the auditor’s report
Who should sign written representation letter?
By the members of management responsible for the financial statements and knowledgeable about the matters contained in the letter
What opinion can the inability to obtain sufficient appropriate audit evidence concerning the financial statements as a whole (i.e. is pervasive) lead to?
A disclaimer of opinion
Where is infprmation about custoemrs exceeding their credit limits stored?
On the master file
How is programming controlled?
By general controls
What is audit software?
A computer program designed for audit procedures on the client’s data
What is test data?
Data generated by the auditor processed through the client’s system
What sort of technique is automating the extraction of a sample of customer accounts for external confirmation? (audit or test)
Audit software technique
What sort of technique is reperforming the summation of entries in a computerised bank ledger account to confirm the accuracy of totals? (audit or test)
Audit software technique
What sort of technique is a computer program that compares administration expenses in the general ledger against the prior year? (audit or test)
Audit software technique
What sort of technique is entering dummy sales orders to ensure that those that would take a customer over their credit limit are rejected (audit or test)
Test data technique
Vs of big data? (Vol)
Volume
Vs of big data? (Var)
Varoety
Vs of big data? (Vel)
Velocity
Vs of big data? (Ver)
Veracity
Vs of big data? (Val)
Value
How test for existence for an asset?
Direction of testing is from the financial statements to the physical asset
What is done when FSs do not itemise the individual assets that make up non-current assets?
Auditor will need to select a sample from the non-current asset register
Which audit procedure provides the most relevant evidence to verify the carrying amount of a company’s fleet of cars?
Checking depreciation rates and calculations for the vehicles
What assertion confirms an audit client’s right to use software that is owned by the software developer?
Inspect the end-user license agreement
Direction of testing for overstatement of assets?
From FSs => source documents
Direction of testing for understatement of assets?
Source documents => FSs
Is physically inspect a sample of assets selected from the non-current asset register an example of understatement or overstatement
Overstatement
Is trace a sample of assets inspected at a location to the non-current asset register an example of understatement or overstatement?
Understatement
Is inspect the condition of assets held and assess whether any are impaired an example of understatement or overstatement?
Overstatement
Is agree disposals recorded in the non-current asset register to proceed in the bank ledger account an example of understatement or overstatement?
Understatement
What assertion is tested by
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For a sample of additions recorded in the non-current asset register agree the details (e.g. description, amount and date) to the purchase invoice
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Occurrence
What does analyse of inventory turnover not provide?
Evidence about rights and obligations
Whcih testing is done to determine whether all inventory on hand is reflected in closing inventory?
Completeness
What is minimum time invnetory can be counted?
All items at least once during the year
Should auditor attend one of the counts?
Yes to observe the procedures
What is meant by impracticable for an inventoy count?
Near impossible, if nature of location of inventory may pose a threat to auditor’s safety
What procedure is tested by “Test count a sample of physical inventory and agree to management’s count records”
Completeness
What is meant by positive confirmation request for trade receivables? (Reply agree)
Asks respondents to reply to the auditor indicating whether they agree with the information provided
What is meant by negative confirmation request for trade receivables? (Auditor response problem)
A professional way for the auditor to ask for a response only if there is a problem
How would an auditor trace transactions if the objective of the auditor’s tests of details is to detect possible understatement of sales?
From shipping documents to sales invoices
What is a negative request for confirmation? (Reply only)
Asks respondents to reply only in the event of disagreement (with a given balance)
How is a non-reply treated for a negative confirmation request?
To signify agreement, not appropriate if recipients are expected to ignore the request
Obtain the list of individual customer balances and agree the total to the trade receivables account satisfies which assertions?
Completeness and accuracy
How will a year-end account receivable balance be reduced?
By the amount of the credit note
Is completeness of disclosure of transactions with directors considered to be a significant risk?
Yes as it has detailed requirements for the disclosure
Who approves the amount of dividend to be paid to equity shareholders?
The shareholders
Who will recommend the dividend to the shareholders who must approve it in general meeting?
The board of directors
What assertion does “An auditor traces share-related transactions recorded in the general ledger during the year to the board minutes” satisfy?
Occurrence
What provides audit evidence of a bonus issue of shares during the year?
The register of members
Minutes of general meetings
Requests for external confirmations for receivable (which letterhead)
Client’s letterhead
Which assertion is tested “When auditing a client’s year-end bank balance, an auditor requests a standard bank confirmation report and agrees the balance to the client’s year−end bank reconciliation”?
Existence
Where should cheques be accounted for?
At the date they are sent out
What action should be taken by auditor for:
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During the audit of Fudge Co’s year-end bank reconciliation, the auditor discovered that a material amount of cheques payable to suppliers were drawn and recorded in the books immediately before the year end. The cheques were sent to the suppliers two weeks after the year end.
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Request that the amount of trade payables be increased and the bank balance increased by the total of the cheques
What do banks require for disclosing information? (Written disclose)
Specific written authority from their customers to disclose information to auditors
What is the main purpose of a bank confirmation report? (Confirm info)
Confirm information already available
Does a bank confirmation report include details of any loans or overdrafts in place?
Yes
Does a bank confirmation report contain details on which accounts?
Open accounts and any accounts closed during the period
What audit procedure is useful for
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During the course of the interim audit, the auditor identified the risk that purchases may be understated because goods received at the end of one month are often not invoiced by suppliers until the following month.
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Comparing goods received notes for the last few days of the financial year with the list of individual supplier balances and accruals
When testing AP for completeness through completeness, how should an example be selected?
From the population of all known suppliers
Perform supplier statement reconciliations for a sample of suppliers tests for which assertion
Completeness
Review bank statements for payments made after the year end to identify those payments relating to pre year-end liabilities tests for which assertion?
Completeness
Review outstanding invoices in individual supplier balances more than three months old and enquire of management whether they are valid outstanding liabilities testing for which assertion?
Existence
Select a sample of purchase invoices in the list of individual supplier balances at the year end and agree payments made to bank statements post year end tests for which assertion?
Existence
Which assertion is tested in review after-date purchase invoices and payments for goods/services received before the year end?
Completeness
Cut-off
When could payables be overstated?
Duplication of an invoice
When could payables be understated?
Omission of a payment
Is estimating the remaining useful lives of non-current assets a management or auditor decision
Management decision
What is the biggest threat for a not-for-profit organisation?
Cash
Why is there a need for formal internal controls in a smaller entity as compared with a larger entity?
There is less need because of the owner’s close involvement in the entity’s operations
Why is control risk unlikely to be assessed for not-for-profit organisations?
As assessment has to be based on tests of controls
Is overstatement or understatement of revenue for smaller companies more likely?
Understatement
What if an event occurs after the financial statements are issued? (affects auditor’s opinion)
The auditor has already signed the auditor’s report and so cannot now qualify the opinion
When should audit procedures on subsequent events be performed?
Between date of FSs and date of the auditor’s report
Overall review of FSs characteristics (discussion)
Discussion between reviewers and members of the audit team
Overall review of FSs characteristics (documentation)
Review of documentation
Overall review of FSs characteristics (Check)
Checklists
Overall review of FSs characteristics (Analytical)
Analytical procedures
Is an auditor required to read other infroamation and consider whether there is a material inconsistency or misstatement?
Yes
Does auditor conclude/report on fair presentation of other information?
No
What are completion checklists designed for?
To be used by the audit engagement partner to ensure that all relevant audit procedures have been completed before the auditor’s report is signed
What audit opinion is given for
”
Torte Co has not complied with certain aspects of an applicable financial reporting standard. The auditor concurs with management that the departure is necessary in order to achieve fair presentation of the financial statements. However, it has not been disclosed as a departure from an applicable financial reporting standard in the accounting policy note.
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Qualified opinion on grounds of material misstatement
What audit opinion is given for
”
The accounts of Jay Co include a material receivable that management believes will be paid and does not require any allowance to be made. The auditor does not believe that any part of the balance will be paid.
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Qualified
What audit opinion is given for
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A company’s financial statements include an investment of $45,000 in a company which is in liquidation. It is not yet clear what, if anything, will be recovered. Pending the final report of the liquidators, no allowance has been made in the financial statements. The situation is fully explained in a note to the financial statements. Profit before tax is $200,000.
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Unmodified with empohasis of matter paragraph (as situation is fully explained in a note to the FSs)
Do emphasis of matter paragraph and other matter paragraph affect audit opinion?
NO
When should KAM not be included?
If the auditor disclaims an opinion
What does KAM compsoe of?
The most significant matters selected from those communicated with TCWG
When is KAM required?
For a listed company
When there’s material uncertainty over company’s ability to continue as a going concern but it has been disclosed of? What is the audit opinion?
Express an unmodified opinion but with reference in a Material Uncertainty Related to Going Concern section to the material uncertainty
What if management are unwilling to make assessment of going concern?
Would result in a modified opinion with a qualified or disclaimer opinion
What msut be done if foing concern basis is not appropriate?
Auditor must express an adverse opinion as the basis of accounting is pervasive to the FSs
What should be done if the auditor identifies a number of events and conditions which collectively have implications for going concern?
Perform additional procedures and reassess the components of audit risk
What is the only audit procedure required in respect of the period beyond management’s assessment?
To inquire whether management knows of any indicators of significant doubt beyond the period of assessment
What is a “close call”scenario regarding going concern?
When management’s plans are sufficient to mitigate significant doubt on going concern that exists
Issue if revenue recognised according to contract date rather than over the relevant accounting period?
Revenue could be overstated
What aspects of quality management are relevant to engagement performance?
Direction, supervision and performance and review
Quality management procedures (delegation)
Work delegated to assistants should be directed, supervised and reviewed to ensure the audit is conducted in compliance with ISAs
Quality management procedures (competent)
Assistants should be professionally competent to perform the work delegated to them with due care.
Quality management procedures (supervisory)
Supervisory responsibilities include tracking the progress of the audit to ensure that assistants are competent, understand their tasks and are carrying them out as directed.
What sort of threat is the audit senior was seconded to LV to cover the financial controller?
Self-review threat
What are an auditor’s responsibilities regarding events or conditions beyond the period of management’s assessment?
To inquire whether management knows of any indicators of signi`ficant doubt beyond the period of assessment
Which account is a significant risk for audit of not-for-profit?
Cash
Why is there less need for formal internal controls in a larger entity?
Because of the owner’s close involvement in the entity’s operations
Is voerstatement of revenue likely for a small company?
Yes
When a balance in the list shows company owes more than suppleir’s statement, what does this mean?
An invoice has been psoted twice, or payment has been omitted
What is not true on bank confirmation reports?
The report will only include details of accounts that are open (“live”)at the reporting date
Who approves the amount of dividend paid to equity shareholders?
The shareholders
What does a credit note do to an acocunts receivable account?
Reduces the year-end balance
What does impracticable mean?
It means near impossible
Are additions a transaction or balance?
Transaction
Is programming controlled by general or information processing controls?
General controls
Best use of audit software?
Auditor’s program and client’s data
What is the purpose of obtaining written representations from management?
To confirm management’s belief that it has fulfilled its responsibility for the preparation of the financial statements
What is a bias towards large balances likely detect?
A material overstatement
What does the population size affect?
The decision to sample rather than the size of the sample
What is done to minimise the risk of an error going undetected by the auditor?
A large sample size must be tested
Why should a sample size be larger? (errors)
The more likely an error the more effort must be directed to that area
What is value weighted selection unlikely to detect?
An understatement
What can value weioghted selection detect?
Systematic errors but only those leading to overstatement
What values does MUS select?
Higher values rather than lower
What is a sampling risk?
The risk that the conclusion based on a sample may differ from the conclusion on the entire population
What if the appraiser is not independent of the client?
The auditor may still be able to use the appraiser’s work
Does the auditor make reference to work of an expert in an unmodified opinion?
No
Does the auditor make reference to work of an expert in an modified opinion?
Yes, as a result of the expert’s findings, adds explanatory detail to a modified opinion regarding the reasons for the opinion
What is done to evaluate management’s accounting estimates for reasonableness?
Develop an independent expectation of management’s estimates and test calculations
What is estimation uncertainty?
Susceptibility to an inherent lack of precision in measurement
What increases risk of misstatement in accounting estimate?
Insufficient relevant data and degree of uncertainty associated with assumptions
Hardware Co has a fixed mark-up of 50% on cost. The external auditor’s analytical procedures on the current year’s financial statements shows a gross profit margin of 40% of sales.
What could the problem be?
Some purchases have not been recorded
What could account for an increase in the receivables collection period compared to prior year?
Monthly revenue doubled in June 20X5 due to sales to a new credit customer
How to obtain evidence from a highly automated system?
An increased need for tests of control
Is unnecessary spending part of VFM audit?
No
Are revenue opportunities part of VFM audit?
No
Are financial reporting controls part of VFM audit?
Yes
Are protection of assets part of VFM audit?
No
Where are significant deficiencies in internal control be dislcosed to?
Client management
When a client’s IT system is extensively integrated throughout the company’s financial reporting system? (tests of control vs substantive)
Substantive not likely, tests of control larger reliance
Is reviewing ICQs likely to result in discovery of non-compliance in laws and regulations?
No
Should internal auditors design controls?
No, but can assist management in assessing the design
What should be done when there’s a potential fraudulent authorisation?
Discuss with senior member of the audit team
What does ICQ document in internal controls?
Understanding of the design of the system of internal control
When does audit planning start?
Shortly after the completion of the previous audit
When does audit planning end?
The completion of the current audit engagement
What is an advantage of using standardised working papers?
Facilitates briefing, delegation, supervision, review and quality control of the audit work
What is transfer information?
A copy of the last set of accounts and a detailed trial balance that supports those accounts
When is a safeguard considered a safeguard?
When it is effective
Should all directors in an audit committee be non-executive?
Yes
Who does audit committee usually liaise between?
The auditors and the directors
Does audit engagement partner review all working papers on audit file before issuing an opinion?
No
