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Audit and Assurance > Summary Notes 3 > Flashcards

Summary Notes 3 Flashcards

1
Q

What should the auditor’s overall responses to assessed risks be?

A
  • Emphasise to staff the need to maintain professional scepticism
  • Assign extra or more experienced staff
  • Use the work of experts, internal auditors or other auditors
  • Provide more supervision on the audit
  • Incorporate more unpredictability into the audit procedures
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2
Q

What should the auditor’s response to overall risk be at the assertion level?

A
  • Nature, extent and timing of audit procedures should be responsive to the assessed risks:
  • Nature: type of test
  • Extent: Use of sampling/how much testing
  • Timing - during the year, at the year-end or after year-end

-Consider risks from climate change

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3
Q

What should you do if you wish to rely on the work of others?

A

The auditor of a company has a sole responsibility to form an opinion on the truth and fairness of the financial statements so if they wish to place reliance on the work of others they should carry out the following:

  1. General assessment of the party upon whom the auditor wishes to place reliance: are they competent and objective?
  2. Specific assessment of the work upon which the auditor wishes to place reliance: has it been properly planned and performed, and are the conclusions appropriate?
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4
Q

How do you use the work of internal auditors?

A
  1. Assess the internal audit function:
    - Objectivity
    - Competence
    - Systematic and disciplined approach
  2. Assess the specific work that may be relied upon:
    - Whether work was properly planned, performed, supervised, reviewed and documented
    - Whether there is sufficient appropriate audit evidence
    - Whether conclusions reached are appropriate
  3. The auditor should test the work of internal audit and conclude on its adequacy for the purposes of external audit
    - Are the results of internal audit well received by the company and acted upon?
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5
Q

How do you use an auditor’s expert?

A
  1. Assess the expert:
    - Competence
    - Capability
    - Objectivity
  2. Assess the specific work upon which reliance is to be placed:
    - Relevance and reasonableness of the expert’s findings, and their consistency with other audit evidence
    - Reasonableness of assumptions and methods used
    - Relevance, completeness and accuracy of source data used
  3. Evaluate the adequacy of the work as audit evidence
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6
Q

If the auditor discovers that their client has outsourced functions e.g. payroll, what should they do?

A
  • Obtain an understanding of the services outsourced
  • Consider access to sources of evidence
  • Assess the risks arising
  • Review any assurance reports prepared for the service organisation to provide assurance to user clients and their auditors
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7
Q

What are the objectives of an auditor of a parent company when auditing group financial statements?

A
  • Determine whether to act as the auditor of the group financial statements
  • If acting as auditor of the group FS:
  • Communicate clearly with component auditors
  • Obtain sufficient appropriate audit evidence regarding the financial information of components and the consolidation process to express an opinion on the group financial statements
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8
Q

How does the parent company auditor achieve their objectives when auditing group financial statements?

A
  • Consider whether the group auditor can obtain sufficient appropriate audit evidence e.g. if significant components are audited by other auditors
  • Obtain an understanding of the group, its components and their environments
  • Obtain an understanding of the component auditor’s independence, competence, regulation
  • Set group materiality, which should be higher than component materiality
  • Determine the type of work to be performed by the component auditor in response to assessed risks
  • Communicate with the component auditor (detailed)
  • Evaluate the sufficiency and appropriateness of evidence obtained
  • Form an opinion on the parent company and group financial statements
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9
Q

What requirements should the group audit team communicate with the component auditors?

A
  • Work to perform
  • Form and content of any communications
  • Request confirmation that the component auditor will cooperate with group auditor
  • Ethical requirements relevant to the group audit
  • Materiality
  • Significant risks of misstatement that are relevant to the component audit
  • List of related parties
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10
Q

What matters relevant to the group audit should the component auditors communicate?

A
  • Compliance with ethical requirements
  • Compliance with group audit team requirements
  • Identification of financial information on which the component auditor reports
  • Information on non-compliance
  • Indicators of management bias
  • List of uncorrected misstatements
  • Overall findings and opinion
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11
Q

How do you review the financial statements?

A
  1. Do the financial statements comply with Companies Act and accounting standards?
    - Use a checklist to determine whether disclosures have been properly made
  2. Do the financial statements make sense?
    Use analytical procedures:
    - Interpretation: review the financial statements considering absolute figures and ratios
    - Investigation: Unusual movements or numbers should have been identified as audit risks so the answers to questions should be in the audit working papers
    - Corroboration: If answers cannot be found in the working papers then further work is required
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12
Q

How do you evaluate misstatements identified during the audit?

A

The auditor should accumulate misstatements identified during the audit and:

  • Inform management
  • Reassess materiality
  • Determine whether uncorrected misstatements are material, individually or in aggregate
  • Seek written management representations to confirm that the effect of uncorrected misstatement is immaterial
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13
Q

How do you approach opening balances (initial audit engagements)?

A

The auditor should consider whether there is sufficient evidence to support the opening balances figures and carry out procedures including:

  • Agree b/f figures to last year’s financial statements
  • Assess accounting policies applied to opening balances

Perform at least one of the following:

  • Review previous auditor’s working papers
  • Consider whether this year’s audit tests provide evidence over opening balances
  • Perform specific procedures on opening balances

If last years FS were not audited, disclose this in the notes

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14
Q

How do you approach comparative information?

A
  • The auditor must obtain sufficient evidence that the comparatives are true and fair
  • If there was misstatement in last year’s financial statements and the matter remains unresolved then the auditor should consider the need to modify their opinion in this year’s audit report
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15
Q

What is the going concern basis? What if there are a doubts as to a company’s status as a going concern?

A
  • The going concern basis is used to prepare company financial statements, unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so
  • If there are doubts over the company’s ability to continue as a going concern, they must be disclosed in the financial statements
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16
Q

What do you do if the company is not a going concern?

A

The financial statements should be prepared on the break-up/liquidation basis:

  • No long-term assets or liabilities
  • Assets valued at recoverable amount
  • Provisions may be required for new costs e.g. redundancies
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17
Q

At what stages should the auditor consider going conern?

A

At all stages of the audit:
Planning stage:
- Understand the entity, its operating environment, internal control systems
- Consider business risk identification/assessment process carefully

Evidence stage:
- Make enquiries of management and consider management bias risk
Procedures can include:
- Review future plans including latest interim/management accounts and other relevant forecasts/projections
- Reading minutes of meetings of shareholders and directors
- Review borrowing facilities/finance

Reporting stage: Consider the implications for the audit report

Remember that management should always perform their own assessment of the going concern basis

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18
Q

What is an adjusting event?

A
  • Provide evidence of conditions that existed at the date of the financial statements
  • The FS should be adjusted
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19
Q

What is a non-adjusting event?

A
  • Provide evidence of conditions that arose after the date of the financial statements
  • The event should be disclosed in the financial statements (but if the non-adjusting event is so significant that it affects the going concern basis of the company then the FS should be restated)
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20
Q

What is the audit response to subsequent events between year end and audit report sign-off?

A
  • Active responsibility to carry out procedures to identify events that require adjustment or disclosure
  • Seek written management representations that all subsequent events have been included in the financial statements
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21
Q

What is the audit response to subsequent events after signing off the audit report?

A

If the auditor becomes aware of subsequent events, ask directors to amend the financial statements

If they do not then act to prevent reliance on the audit report e.g.

  • Seek legal advice
  • Use right to speak at AGM
  • Consider resignation
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22
Q

When should the management representation letter be signed?

A

The management representation letter should be signed by the directors before the audit report is signed

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23
Q

What matters should be communicated to those charged with governance?

A
  • Responsibilities of the auditor in relation to the financial statements audit
  • An overview of the planned scope and timing of the audit
  • Significant findings of the audit
  • For listed clients, matters that have a bearing on auditor independence and the safeguards that have been put in place to eliminate them

Communication shall be in any appropriate form, although the matters that must be communicated with regards to independence matters for listed clients must be communicated in writing

24
Q

How do you communicate deficiencies in internal control?

A

A report to management would generally include:

  • A covering letter
  • Appendices showing, typically in tabular format, the control deficiencies, implications and recommendations for improvement

Normally three sections:
Deficiency: Statement of fact (normally given in exam so need to repeat)
Consequences:
- Risks of non-compliance (laws & regulations)
- Costs to the business (e.g. losses, adverse impact on cash flow, loss of customer goodwill)
- Possibility of misstatements in the financial statements
Recommendations:
- Specific: Who/what/when/where/how
- Commercially feasible

25
Q

What are the two types of audit reports?

A
  • Unmodified

- Modified

26
Q

What are the options in a modified report?

A

Unmodified opinion on FS:

  • Emphasis of matter OR
  • Other Matter

Modified opinion:

  • Qualified ‘except for’
  • Adverse (do not give a true and fair view)
  • Disclaimer (unable to give an opinion)
27
Q

What is an express opinion?

A

ALWAYS REQUIRED:

  • Whether the financial statements give a true and fair view
  • Whether the financial statements have been properly prepared in accordance with Companies Act 2006 and the relevant financial reporting framework
  • Whether the directors’ report and strategic report are consistent with the financial statements
28
Q

What are implied opinions?

A

Report by exception under Companies Act 2006:

  • Adequate accounting records have been kept
  • Returns adequate for our audit have been received from branches not visited
  • Financial statements are in agreement with the accounting records
  • Disclosures of directors’ remuneration have been made
  • We have received all the information and explanations necessary for the audit
29
Q

What are the UK Corporate Governance Code requirements (reporting the audit)?

A
  • Report by exception if no corporate governance statement included
  • Report on the company’s compliance with the provisions of the UK Corporate Governance Code
30
Q

What is a ‘Bannerman paragraph’?

A

UK audit reports may include a ‘Bannerman paragraph’:

No liability accepted to anyone other than the company and the shareholders as a body

31
Q

What is an emphasis of matter paragraph?

A
  • Used to highlight a matter which has been properly disclosed in the financial statements
  • Headed up ‘Emphasis of Matter’
  • Describes the matter and refers to the disclosures made in the financial statements
  • States that the audit opinion is not modified in this respect
32
Q

What is an Other Matter paragraph?

A
  • Used to highlight a matter not included in the financial statements but is key to the understanding of the FS
  • Headed up ‘Other Matter’
  • Describes the matter
33
Q

What if the client does not make the required adjustment for a misstatement, or no alternative audit evidence can be found?

A

The audit report will:

  • Show a modified opinion
  • Explain the reason for the modification after the opinion in a ‘basis for modified opinion’ paragraph
34
Q

What if the matter giving rise to the modification is material but not pervasive?

A

Qualified (‘except for’) opinion for both:

  • Financial statements are materially misstated
  • Inability to obtain sufficient appropriate audit evidence
35
Q

What opinion should you give if the financial statements are misstated both materially and pervasively?

A

Adverse opinion:

‘In our opinion, because of the significance of the matter described in the basis for adverse opinion paragraph, the financial statements do NOT give a true and fair view…”

36
Q

What opinion should you give if the inability to obtain sufficient appropriate audit evidence is material and pervasive?

A

Disclaimer of opinion:
@Because of the significance of the possible impact of the uncertainties, described in the basis for disclaimer of opinion paragraph, we DO NOT EXPRESS an opinion on the financial statements…”

37
Q

What is the impact on the audit report when the company is a going concern and there are no material uncertainties regarding going concern?

A
  • Unmodified opinion

- Include ‘Conclusions relating to going concern’ section

38
Q

What is the impact on the audit report when the company is not a going concern, but the directors have prepared the financial statements on the going concern basis?

A
  • Material and pervasive misstatement
  • Do not include the ‘Conclusions relating to going concern’ section
  • Adverse opinion
39
Q

What is the impact on the audit report when the company is not a going concern, and the directors have prepared the financial statements on the break-up/liquidation basis, with adequate disclosure of the basis of preparation?

A
  • The financial statements are not misstated
  • Do not include ‘the Conclusions relating to going concern’ section
  • Unmodified opinion
  • An emphasis of matter paragraph is used to highlight the disclosure to the users of the financial statements
40
Q

What is the impact on the audit report when the going concern status of the company is uncertain and the directors have made adequate disclosure of the uncertainty?

A
  • The financial statements are not misstated
  • Do not include the ‘Conclusions relating to going concern’ section
  • A separate section is included in the auditor’s report under the heading ‘Material Uncertainty Related to Going Concern’ to:
  • Draw attention to the disclosure note
  • State that the material uncertainty may cast significant doubt on the entity’s ability to continue as a going concern
  • State that the auditor’s opinion is not modified in this respect
41
Q

What is the impact on the audit report when the going concern status of the company is uncertain and the directors have not made adequate disclosure of the uncertainty?

A
  • Material misstatement (may be considered pervasive)
  • Do not include the ‘Conclusions relating to going concern’ section
  • Qualified (‘except for’) opinion
  • Explain in the ‘Basis for qualified/adverse opinion’ section that the material uncertainty exists and it is not disclosed adequately
42
Q

What is the impact on the audit report if the directors have based their assessment on forecasts prepared for a period of less than 12 months?

A

If management have considered a shorter period:

  • They will be asked to extend this assessment by the auditors
  • If they refuse, it will be discussed with those charged with governance
  • If the assessment is not extended, the auditor should consider whether they have sufficient appropriate audit evidence to conclude on going concern and consider the impact this will have on the audit report
43
Q

What are some additional reporting requirements for listed entities?

A

Perform necessary procedures to identify if any material inconsistencies exist between the auditor’s knowledge and the annual report/board statements

44
Q

How does the auditor deal with the Directors’ report/Strategic report?

A

Companies Act 2006: This opinion is included in a section of the auditor’s report entitled Opinion on other matters prescribed by Companies Act 2006

The auditor is required to read the information, and if any inconsistencies are identified:

  • Discuss the matter with management
  • If the inconsistency is not resolved, amend the auditor’s report
45
Q

How does the auditor deal with other information published with the financial statements?

A

ISA 700 requires the audit report to include a separate section with the heading ‘Other information’

Covers:

  • Management is responsible for other information
  • The audit opinion does not cover other information
  • The auditor is responsible for reading the other information
  • A statement that there is nothing to report, or details of any material misstatement
46
Q

When do charities require a statutory audit?

A
  • Gross income more than £1million
    OR
  • Gross assets are more than £3,26 million and gross annual income is more than £250,000
47
Q

When do charities require independent verification of the financial statements?

A
  • When gross income is between £25,000 and £1m

- This must be by a qualified accountant if income is more than £250,000

48
Q

When must charities send a copy of accounts to the Charity Commission?

A

When gross income is more than £25,000

49
Q

What are the principles of public sector audit?

A
  1. Independence of public sector auditors from the bodies they audit
  2. The wide scope of audit in the public sector
  3. The ability of public sector auditors to make their results available to the public
50
Q

What is the scope of public sector audit?

A

A public sector audit does not just cover the financial statements and review of internal control systems, but also extends to the following:

Regularity: Transactions are carried out in accordance with legislation and regulations

Propriety: Transactions and business are carried out ethically, with integrity and according to any existing standards of conduct

Value for money:
Best use if being made of resources i.e. the audit evaluates the use of public resources in terms of:
- Economy (spend less)
- Efficiency (spend well)
- Effectiveness (spend wisely)
51
Q

How do you examine prospective financial information?

A

This is an assurance service and reasonable assurance cannot be provided.

  • Consider management’s competence regarding the preparation of forecasts
  • Assess the reasonableness of assumptions made
  • Check the forecasts have actually been prepared on the basis of these assumptions
  • Check mathematical accuracy
  • If any of the period of the forecast has already elapsed, compare to historic information
  • Seek written management representations
52
Q

What are engagements to review financial statements?

A

As this is a limited assurance engagement, work is generally limited to:

  • Enquiries of management and others within the entity
  • Analytical and other review procedures
  • Seeking written management representations
53
Q

How do you report on assurance engagements?

A
  • Work done is likely to be limited e.g. to enquiry of management, analytical and other review procedures and seeking written management representations
  • Limited assurance is given
  • The conclusion is expressed negatively e.g. ‘Nothing has come to our attention to suggest that the financial statements do not give a true & fair view’
  • If the report is on prospective financial information then a caveat should be included
54
Q

How do you report on greenhouse gas statements?

A

Listed companies have to disclose greenhouse gas emissions from April 2013 (voluntary for other companies)

In an assurance engagement to report on the Greenhouse gas statement (GHGS):

  1. The level of assurance could be:
    - Reasonable - an opinion on whether the GHGS has been prepared in accordance with the acceptable criteria; or
    - Limited - a conclusion on whether anything has come to the practitioner’s attention to indicated that the GHGS has not been prepared in accordance with the acceptable criteria
  2. The engagement is likely to be complex, involving multidisciplinary teams (e.g. scientific expertise) and subject to uncertainty due to difficulty of estimation and measurement
55
Q

When do you modify an assurance report?

A

Where there are problems in an assurance engagement i.e.:

  • Matters have come to the attention of the assurance provider; or
  • The assurance provider has not obtained sufficient evidence on which to base their conclusion

Then a modification similar in nature to modified audit opinions may be necessary

Audit and Assurance (17 decks)

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