The Role Of Audit - 45% Flashcards
What is an audit ?
An audit is an exercise who is objective is to enable auditors to express an opinion whether the financial statements are prepared in all materials respects, in accordance with the identified financial reporting frameworks. The phases used to express the auditors opinions are given a true and Fairview or present fairly in all materials respects which are equivalent terms.
Define fair representation
Requires the faithful representation of the effect of the transactions or all the events and conditions in accordance with the definitions and recognition criteria for assets, liabilities income and expenses set out in the applicable frameworks
What is an expectations gap ?
External audits, do you not however, give complete assurance that a set of financial statements are free from error. Where this is not understood by the external investors this creates an expectation gap.
Define materiality
This is the expression of relative significance or importance of a particular matter in context of the financial statement as a whole. The matter is material, if it emissions or misstatements with recently influence, the decision of the addressee of the auditors report, it has both qualitative and quantitive aspects.
Calculating materiality
Profit before tax = 5%
Gross profit = 0.5 - 1%
Revenue = 0.5-1%
Total assets = 1-2%
Net assets = 2-5%
Profit after tax = 5-10%
Define engagement with client covering
- Communication with all three parties-managers, directors and shareholders and the auditor
-The subject matter - the financial statements
-Agree, insufficient and appropriate evidence- covering quantity and quality of the evidence - Evaluating whether the financial statements have been prepared in accordance with the relevant financial reporting frameworks.
-The audit report- opinion, on truth and fairness.
Drafting an engaged letter with the client covering :
- objectivity, and scope of the audit
-The auditors responsibility
-The responsibility of management
-The identification of relevant and financial reporting frameworks
-Reference to the aspect form of any reports to be issued
An assessment of audit risk which is the sum of
-The restart the financial statements contain a material error
&
The risk that an auditor failed to detect any material misstatement
Risks of audit
Financial statements contain material error is compromised of
- Inherent risk- this acceptability of a transaction of balance to material misstatement
Plus
- Control risk - the risk that I miss statement would not be prevented or detected by an internal control procedures.
The rest of the auditor feels to detect any material misstatement known as detection risk
Overall risk is ( audit risk= control risk x inherent risk x direct risk
Audit processes
Audit process will focus in gathering evidence that supports the figures statements found within the financial statement
Audit evidence should have the following qualities;
- Sufficient-this relates to the quantity of the evidence
-Appropriate- this relates to the reliability and the relevance of the evidence
Audit tests of controls
Audit procedures designed to evaluate the operating effectiveness of controls in preventing or detecting or correcting material misstatementS
Enquire and document controls
Perform transactions
Inspect control mechanisms
Audit testing analytical review
Testing of large volumes of predictable data by developing unexpected balance, comparing the actual data and reconciling any material differences
Audit testing substantive tests
Test designed to detect material misstatement
Reconciling financial statements to accounting records
Examining material, journal entries
Examining the adjustments made in preparing financial statements
Internal audit definition
Independent, internal appraisal activity- examining and evaluating the adequacy and effectiveness of other controls. Two main features are independence and appraisal
Objectives of internal audit
-review of the accounting internal control system
-Examination of financial and operating information
-Review of economy, efficiency and effectiveness
-Review of compliance
-Review of assets, safeguards
-Review of implementation of corporate objectives
-Identification of risk and risk management
-Special investigation into any aspect of the organisation
Types of internal audits
-value for money
-Project/it
-Operational
-procedurement
-Financial
Social and environmental
Management
Compliance
Who is the internal auditor accountable to?
Internal auditor is accountable to the highest executive level in organisation prefer play the audit committee of the board of directors
