The concept of audit and other assurance engagements

Question 1

The purpose of external audit - ISA 200

Answer 1

• to promote confidence and trust in financial information
• enable auditor to express an independent opinion whether the FS
  1. are free from material misstatement, whether due to fraud and error
  2. have been prepared, in all material aspects, in accordance with acceptable financial reporting framework
  3. comply with statutory requirement

Question 2

Director’s responsibilities

Answer 2

• must prepare FS for shareholders
• responsible to ensure that entity complies with relevant laws and regulations
• account for their stewardship of the assets placed under their control

Question 3

Auditor’s responsibilities

Answer 3

Seek to provide an opinion (give reasonable assurance - not guarantee) as to whether the FS are “presented fairly” and give a “true and fair” view
In this sense, auditor:
- have only a limited responsibility to detect fraud
- not responsible for prevention of non-compliance
- not expected to detect instance of non-compliance
- need to understand their clients in depth
- plan work to detect material errors and fraud, only, by
* obtaining reasonable assurance that the FS are free
from material misstatment
* considering those laws and regulations that have a direct & indirect effect on materiality and disclosures
- report this to management (primary legal responsibility)

Question 4

Auditor’s objectives - ISA 250

Answer 4

• to obtain sufficient and appropriate evidence regarding compliance
• to perform specific audit procedures to help identify non-compliance
• to respond appropriately to non-compliance/ suspected non-compliance

Question 5

Auditor’s overall objective (responsibilities) - ISA 200

Answer 5

To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement whether due to fraud and error

Question 6

What is meant by TRUE (&fair view)?

Answer 6

1. Information is:
   - factual and conform with reality
   - conforms with required standard and laws
2. The FS have been correctly extracted from the books and records

Question 7

What is meant by FAIR (&true view)?

Answer 7

1. Information is:
   - free from discrimination and bias
   - in accordance with expected standards and rules
2. The accounts reflect the commercial substance of the company’s underlying transactions

Question 8

What is meant by “present fairly”?

Answer 8

The FS show a true and fair view; they are factual and free from bias

Question 9

What is NON-COMPLIANCE?

Answer 9

acts of omission or commission by the enetity , either intentional or non-intentional, which are contrary to the prevailing laws or regulations.

Question 10

What are the 5 element of an assurance engagement?

Answer 10

CREST
Criteria -suitable (in order to reach an opinion)
Report - written assurance report: reasonable/limited
Evidence - sufficient appropriate
Subject matter - appropriate (fin.perf., non-fin. perf., behaviour)
Three party relationship - auditor/ responsible party/ users

Question 11

What types of assurance can be provided/ levels of assurance?

Answer 11

1. Positive/reasonable assurance

2. Negative/limited assurance

Question 12

What does a reasonable assurance engagement provides?

Answer 12

A positive assurance (external audit) - a high but not absolute level of assurance

Question 13

What does a limited assurance engagement provides?

Answer 13

A negative assurance (in the review engagement) - a type of assurance engagement
“based on our review, nothing has come to our attention to indicate that the financial statements contain material misstatement”

Question 14

What is the objective of an asssurance engagement?

Answer 14

To provide assurance from an independent source that the subject matter agrees with the set criteria.

Question 15

When would a practitioner NOT be able to express an unmodified conclusion on an assurance engagement?

Answer 15

• There is a limitation of scope of the practitioner’s work

- The assertion is not fairly stated or the subject matter information is materially misstated.

Question 16

What is materiality?

Answer 16

Misstatements, including omissions, which arise from fraud and error, are considered material if, individually or aggregated, could reasonable be expected to influence the economic decision of users, taken on the basis of the FS.

Question 17

What is performance materiality?

Answer 17

Materiality refers to FS as a whole.
Performance materiality is an amount set by auditor, when designing the audit procedures, at less than materiality, to reduce the risk that misstatements, in aggregate, exceed FS materiality.

Question 18

Engagement letter

Answer 18

A contract between client and auditor which signify the acceptance of the appointment.
It clearly defines:
- the scope of the audit
- the extent of auditor responsibilities

Question 19

What are the elements of an Engagement Letter?

Answer 19

• confirmation of the appointment
• responsibilities of
• directors (Companies Act)
• auditors (professional responsibility)
• the scope of the audit
• management representation (confirmation that will seek)
• other information
• irregularities and fraud
• post Balance Sheet events
• other services
• fees
• law governing the terms of contract
• complaints procedures

Question 20

Written representation

Answer 20

• necessary as audit evidence (on matters affecting FS)
• mentioned in the letter of engagement
• issued during the final review stage
• to confirm management responsibilities
• where required other ISAs
• to support other evidence
• to confirm that management have communicated to auditor all known deficiencies in IC

Question 21

Summary of the audit process

Answer 21

1. Accept
2. Plan
3. Perform (gather evidence)
4. Revisit planning consideration
5. Complete
   Conclude on findings
6. Revisit planning consideration
7. Issue Audit Opinion
8. Debrief with audit team
   Highlight issues for next audit and for reappointment considerations

Question 22

Expectation gap

Answer 22

Appears due to the fact that auditors:
- are not responsible for accounts preparation
- are not legally responsible to detect fraud
- rarely check all transactions
- do not certify that the accounts are correct
if auditor issue an unqualified report - does not guarantee that the company is a going concern

Question 23

Direct laws and regulations

Answer 23

Auditors need to gather sufficient and appropriate evidence that entity complied with such laws and regulations

Question 24

Indirect laws and regulations

Answer 24

Auditors perform specific audit procedures with the objective of identifying non-compliance with such laws and regulations

Question 25

Materiality levels

Answer 25

• 5% of Profit
• 1% of Revenue
• 1% of Total Assets

Question 26

Materiality by nature

Answer 26

0% - in connection to related parties

to be disclosed

Question 27

Audit engagement

Answer 27

• Provide a positive assurance which is a higher level of assurance comparing to negative assurance
• Auditors give an opinion on financial statements
• Usually state in the report as “In our opinion…”
• The risk is reduced to an acceptably low level
• Auditors need to make examination on subject matters by obtaining sufficient appropriate evidence to form a basis for opinion

Question 28

Review engagement

Answer 28

• Provide a negative or limited assurance
• Auditors or professional accountants do not give an opinion on financial statements or subject matters
• Usually state in the report as “nothing has come to our attention…”
• The risk is reduced to a moderate level
• Auditors or professional accountants only need to review subject matters

Question 29

Define Audit

Answer 29

The audit represents an independent examination of and expression of an opinion on the FS of an entity.

Question 30

What percentage benchmarks are often applied as a starting point in determining materiality?

Answer 30

Revenue >1%
Total Assets >1%
Profit >5%

Question 31

What 2 types of fraud may result in the misstatement of the FS?

Answer 31

• Managers can override controls

- Employees can

Question 32

How are the auditor’s responsibilities fulfilled?

Answer 32

Auditor is required to assess the risk of material misstatement of the FS, whether due to fraud or error.
to do this, Auditor needs to obtain sufficient and appropriate evidence regarding the assessed risk of material misstatement due to fraud, through designing and implementing appropriate responses.
Audit must respond appropriately to fraud and error or suspected fraud and error identified during the audit.
Auditor is responsible to maintain professional scepticism throughout the audit:
* considering the potential for management to overrride controls
* recognising that the audit procedures that are effective in detecting error, may not be as effective in detecting fraud.

Question 33

Auditors’ rights

Answer 33

1. Access to records (at all times)
2. Information and explanations (they consider necessary)
3. Attendance at and Notice of any General Meeting (as any member)
4. Right to speak at GM
5. Rights in relation to written resolution
6. Right to require laying of accounts (notice of a GM)