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AA > Theory > Flashcards

Theory Flashcards

1
Q

Elements of assurance engagement (CREST)

A
  • Criteria
  • Report containing conclusion
  • Evidence to support conclusion
  • Subject mater
  • 3 party relationship (responsible party/practitioner/intended user)
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2
Q

Benefits of assurance engagements

A
  • Enhance credibility of information
  • Reduces risk of management bias/error/fraud
  • Draws attention to deficiencies
  • Professional/objective/unbiased opinion
  • Ensures high quality/reliable information circulates market
  • Gives investors added faith in market
  • Improves reputation of organisation trading in market
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3
Q

Reasonable assurance

A

High assurance
Expressed positively
In our opinion provides a true and fair view…..

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4
Q

Limited assurance

A

Moderate assurance
Expressed negatively
Nothing has come to our attention….

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5
Q

Audit small company criteria

A

Turnover < £10.2 million
Balance sheet < £5.1 million
Employees < 50

Meet 2 out of 3

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6
Q

Work undertaken for audit (ISA500)

A 
Inspection
Observation
External confirmation
Recalculation
Re-performance
Analytical procedures
Inquiry
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7
Q

Work undertaken for review of FS (ISRE2400)

A

Inquiry

Analytical procedures

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8
Q

Work undertaken for review of prospective information (ISAE3400)

A

Assessment of assumptions
Re-computation
Written representations

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9
Q

Responsibilities of statutory auditor

A
  • Form independent opinion on truth/fairness of accounts
  • Confirm accounts prepared in accordance with CA
  • Confirm whether info given in director’s report is consistent
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10
Q

Responsibilities of management

A
  • Manage business to achieve objectives
  • Assess business risk
  • Safeguarding assets
  • Keeping accounting records
  • Preparing FS
  • Compliance with laws
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11
Q

2 types of fraud

A
  • Misstatement from fraudulent financial reporting

- Misstatements from misappropriation of assets

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12
Q

Fraud risks

A
  • Management with poor integrity
  • Deficient internal controls
  • Unusual transactions
  • Financial reporting pressures
  • Problems in gaining audit evidence
  • Unique issues arising from systems
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13
Q

Related parties - issues

A
  • May have undue influence on entity
  • Transaction may not be arm’s length
  • Risk of non-disclosure
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14
Q

Related parties - audit work at

A
  • Planning stage
  • Detailed work stage
  • Review stage
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15
Q

Related parties - planning

A

Consider materiality

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16
Q

Related parties - detailed testing

A
  • Obtain full list of related parties
  • Ensure audit team aware
  • Audit evidence may be limited
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17
Q

Related parties - documentation

A

Written representations

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18
Q

Laws and regulations - planning

A

Understand legal framework

Assess risk of non-compliance

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19
Q

Laws and regulations - evidence

A

Inquiry of management

Written representations

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20
Q

Laws and regulations - documentation

A

Impact of non-compliance on audit opinion

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21
Q

Reporting non-compliance

A

Those charged with governance
Shareholders
Third parties

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22
Q

Money laundering offences

A
  • Possessing/dealing/concealing proceeds of crime
  • Attempting/assisting/incitement to commit laundering
  • Failure of individual in regulated sector to report suspicion
  • Tipping off
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23
Q

Money laundering requirements

A
  • Appoint ML compliance principal (MLCP)
  • Appoint ML reporting officer (MRLO)
  • Customer due diligence
  • Report suspicion without tipping off
  • Maintain specific record
  • Policies to ensure compliance
  • Train staff
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24
Q

Expectations gap - common misconceptions

A
  • Auditor is responsible for preparing FS
  • Auditor is responsible for detecting fraud
  • Auditor checks all transactions
  • Clean audit report means FS are correct
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25
Q

Expectations gap - narrowing the gap

A
  • Report sets of directors responsibilities
  • Report sets out auditor responsibilities
  • Report explain how audit is conducted
  • Role of audit committees in corporate governance
  • Engagement letter sets out responsibilities
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26
Q

Expectations gap - why things still go wrong

A
  • Companies still fail
  • Fraud is committed
  • Genuine mistakes are made
  • Audit failure can occur through no fault or negligence
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27
Q

IFAC role

A

Issue ISAs

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28
Q

ISAs contain

A
  • Basic principles
  • Essential procedures
  • Explanatory material
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29
Q

Depart from ISA when

A

Exceptional circumstances mean departure is only way to achieve audit objectives

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30
Q

Apply ISAs to

A

Material matters only

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31
Q

FRC ISAs based on

A

IAASB’s ISAs augmented by extra sections on UK issues

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32
Q

FRC practice notes

A

Assist audit in applying ISAs
Persuasive not prescriptive
Indicative of good practice
Similar to ISAs explanatory material

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33
Q

FRC bulletins

A

Provide auditor with timely guidance on new/emerging issues

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34
Q

FRC ethical standard purpose

A

Provides guidance on ethical dilemmas

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35
Q

Directors role with internal controls

A
  • Set up system of internal controls
  • Review ts effectiveness
  • Consider need for internal audit
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36
Q

Auditor role with internal controls

A
  • Ascertain control
  • Review controls
  • Evaluate controls
  • Determine audit approach based on controls

Additional services provided separate from audit:

  • Review design of control system
  • Review operations of control system
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37
Q

5 ethical principles (PIPCO)

A 
Professional competence and due care
Integrity
Professional behaviour
Confidentiality
Objectivity
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38
Q

Integrity

A

Straightforward and honest

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39
Q

Objectivity

A

Not allow bias/conflict of interest/undue influence to override judgement

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40
Q

Professional competence and due care

A

Maintain professional knowledge / act in accordance with standards

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41
Q

Confidentiality

A

Disclose only with proper authority / do not use for personal advantage

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42
Q

Professional behaviour

A

Comply with relevant laws / avoid discrediting profession

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43
Q

6 threats (MASSIF)

A 
Management
Advocacy
Self-interest
Self-review
Intimidation
Familiarity
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44
Q

Self-interest threat examples

A

Financial interests
Incentive compensation
Undue dependence on fees

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45
Q

Self-review threat example

A

Data reviewed by preparer

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46
Q

Advocacy threat examples

A

Acting as advocate during litigation

Promoting shares of client

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47
Q

Familiarity threat examples

A

Former partner of firm being director of client

No rotation of engagement teams

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48
Q

Intimidation threat examples

A

Threat of dismissal/replacement

Pressured to reduce work performed to reduce fee

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49
Q

3 categories of safeguards

A

Regulations
Individual
Work environment

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50
Q

Safeguards - regulations

A

ICAEW code
IESBA code
FRC ethical standard
ISAs (UK)

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51
Q

Safeguards - individual

A

CPD
Keeping record of contentious issues
Independent mentor
Contact with legal advisers/professional bodies

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52
Q

Safeguards - work environment

A

Recruitment procedures
Disciplinary procedures
Ethical leadership
Policies for monitoring employee performance
Policies for monitoring engagement quality control
Different partners/teams for non-audit services
Discussing ethics with those charged with governance
Consultation with another accountant

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53
Q

Independence of mind

A

State of mind that enables opinions not affected by influences that compromise professional judgement

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54
Q

Independence in appearance

A

Avoidance of circumstance so significant reasonable/informed third party having knowledge of all facts and safeguards would conclude objectivity had been compromised

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55
Q

Threats to independence

A 
Actual/threatened litigation
Financial interests
Loans/guarantees
Business relationships
Family/personal relationships
Employment connections with clients
Long association
Gifts/hospitality
Provision of non-audit services
Fees
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56
Q

Safeguards against loss of objectivity

A

Quality control procedures
Audit committee (non-execs)
Audit rotation

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57
Q

Advantages of audit committee

A

For auditor independent liaison between exec directors

For company can give increased confidence in reporting

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58
Q

Benefit of audit rotation

A

Loss of independence through familiarity is guarded against

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59
Q

Obligatory disclosures

A

Suspects client to have committed:

  • Terrorist offence
  • Treason
  • Money laundering
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60
Q

Voluntary disclosures

A
  • To comply with the quality review of ICAEW
  • To respond to an inquiry/investigation by ICAEW
  • To protect professional interest of accountant in legal proceedings
  • To comply with technical/professional/ethical standards
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61
Q

Opinion shopping

A

Client seeks second opinion from other auditors

Duty for auditors to communicate with first auditor

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62
Q

Quality control safeguards for firms

A
  • Observing acceptance procedures (not accepting difficult clients)
  • Client care procedures
  • Key man insurance
  • Setting up of quality control system
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63
Q

Leadership responsibilities for QC

A
  • Sufficient/appropriate experience
  • Ability to carry out job
  • Authority to carry out job
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64
Q

Human resources QC

A
  • Recruitment
  • Capabilities
  • Career development
  • Compensation
  • Performance evaluation
  • Competence
  • Promotion
  • Estimation of personnel needs
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65
Q

Engagement partner responsibility - engagement performance

A
  • Direction
  • Supervision
  • Review
  • Consultation
  • Resolution of disputes
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66
Q

QC monitoring procedures must be

A
  • Relevant
  • Adequate
  • Operating effectively
  • Complied with
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67
Q

QC monitoring corrective actions

A
  • Remedial action with individual
  • Communication with training department
  • Changes in QC procedures
  • Disciplinary action
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68
Q

Engagement partner responsibilities - direction

A

Informing staff about:

  • Work to do
  • Nature of client
  • Potential problems
  • Responsibilities
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69
Q

Engagement partner responsibilities - review

A

Consideration of whether:

  • Work complies with standards
  • Significant matters/conclusions documented
  • Evidence if sufficient/appropriate
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70
Q

Engagement partner responsibilities - consultation

A

Contentious matters must be discussed and properly reviewed

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71
Q

Engagement partner responsibilities - QC review

A

Evaluation of:

  • Significant judgements
  • Conclusions
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72
Q

Consequences of getting audit wrong

A
  • Being sued for negligence
  • Prosecutions/fines
  • Disciplinary procedures from ICAEW
  • Loss of reputation/clients/key staff
  • Collapse of assurance firm
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73
Q

Fee rules

A
  • No prescribed basis
  • Percentage/contingency only for non-assurance
  • Quoting too low (lowballing) may threaten competence and due care
  • Fair and reasonable regarding staff/time/risk
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74
Q

Tendering process

A

1) Firm considers if it wants the work
2) Consider practical issues e.g. staff/location
3) Estimate work involved/fees
4) Obtain further details from client (work required/background information)
5) Prepare proposal

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75
Q

Factors for consideration in client screening

A
  • Management integrity
  • Risk
  • Relationships
  • Ability to perform work
  • Engagement economics
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76
Q

High risk client indicators

A
  • Poor performance
  • Lack of finance
  • Odd accounting
  • Lack of FD
  • Significant related party/unusual transactions
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77
Q

Low risk client indicators

A
  • Good prospects
  • Well finances
  • Strong controls
  • Prudent accounting
  • Competent directors
  • No unusual transactions
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78
Q

Sources of info about new clients

A
  • Enquiries of other sources (bankers/solicitors)
  • Review of documents (accounts/credit rating)
  • Previous auditors
  • Review of rules/standards relevant to industry
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79
Q

Before acceptance auditor should

A
  • Ensure professional qualified to act (legally/ethically)
  • Ensure resources are adequate (time/staff)
  • Obtain references
  • Communicate with present auditor
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80
Q

After acceptance auditor should

A
  • Ensure outgoing auditors removal properly conducted
  • Ensure new auditor appointment is valid
  • Set up/submit letter of engagement
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81
Q

Appointment decision - first audit

A

No need to follow professional rules

Make own decision

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82
Q

Appointment decision - client refuses permission to contact outgoing auditor/let outgoing auditor reply

A

Decline appointment

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83
Q

Items included in engagement letter

A
  • Objective/scope of audit
  • Managements responsibility for FS
  • Form of reports/communications
  • Inherent limitations
  • Arrangement regarding planning
  • Expectations in relation to representations
  • Basis on which fees are calculated
  • Restrictions of auditors liability
  • Reference to further agreements
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84
Q

Audit strategy contents

A

Vague

  • Scope of audit engagement (framework/audit coverage/personnel)
  • Reporting objectives (timing/type of reports)
  • Direction of audit (materiality/preliminary high risk areas)
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85
Q

Audit plan contents

A

Detailed

  • Description of nature/timing/extent risk assessment procedures
  • Description of nature/timing/extent audit procedures
  • Other audit procedures
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86
Q

Objectives of planning

A
  • Ensure attention devoted to specific areas
  • Potential problems identified
  • Facilitating review
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87
Q

Logistics to consider when planning

A

Staff
Client
Locations
Deadlines

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88
Q

Use of IT examples

A

CAATs
Admin
Communication with partner/staff

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89
Q

Factors to consider when deciding on time/budget

A
  • Prior year time records
  • Help in risk assessment
  • Materiality
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90
Q

Materiality guide - profit before tax

A

5%

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91
Q

Materiality guide - gross profit

A

0.5-1%

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92
Q

Materiality guide - revenue

A

0.5-1%

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93
Q

Materiality guide - total assets

A

1-2%

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94
Q

Materiality guide - net assets

A

2-5%

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95
Q

Materiality guide - profit after tax

A

5-10%

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96
Q

Factors materiality affects

A
  • What/how many items to test
  • Sampling techniques
  • Level of error leading to modification of report
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97
Q

Analytical procedures definition

A

Analysis of plausible relationships among financial/non-financial data

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98
Q

When to use analytical procedures during audit

A
  • Risk assessment procedures
  • Substantive procedures
  • Overall review
99
Q

Analytical approach taken when

A
  • Auditor expects little change in figures

- Auditor has high degree of knowledge of expected changes

100
Q

Analytical approach commonly taken on

A
  • Business risk approach assignments
  • Reviews
  • Assurance engagements
  • Prospective financial information
101
Q

Examples of analytical procedures

A
  • Reasonableness checks
  • Comparison
  • Trend analysis
102
Q

Indications of going concern problems - financial

A
  • Net liabilities
  • Fixed term borrowing maturing without prospect of repayment/renewal
  • Negative operating cash flows
  • Adverse financial ratios
  • Substantial operation losses
  • Inability to pay creditors on due dates
  • Inability to finance new products
  • Withdrawal of financial support
103
Q

Indications of going concern problems - operating

A
  • Loss of key management personnel
  • Labour difficulties
  • Shortages of important supplies
104
Q

Indications of going concern problems - other

A
  • Non-compliance with statutory requirements
  • Pending legal proceedings for claims that cannot be satisfied
  • Changes in law with potential adverse effects
105
Q

Risk factor - management override

A

Management manipulated accounting record to produce misleading FS

106
Q

Risk factor - journals

A

Fraudulent activities perpetrated by inappropriate/unauthorised journal entries

107
Q

Risk factor - revenue recognition

A

Risk especially where management reward linked to revenue/profit

108
Q

Risk factor - cyber security

A

Risk from big data/cloud computing in relation to security of data

109
Q

Matters to gain understanding of about entity (ISA315)

A
  • Nature of business
  • Key personnel and their integrity
  • Laws/regulations that apply to entity
  • Pressure on directors to get good results
  • Relevant industry/regulations/framework
  • Nature of entity
  • Selection/application/suitability of accounting policies
  • Objectives/strategies/business risks that could lead to material misstatement
  • Measurement/review financial performance
  • Internal controls relevant to audit
  • Control environment
  • Process for identifying risk and action taken
  • Financial reporting information system
  • Communication of financial reporting matters
  • Control activities
  • How responded to risks from IT
  • Major types of activity to monitor internal control over financial reporting
  • Nature/activities of internal audit function
  • Sources of information for monitoring activities
110
Q

Responsibilities of management in relation to fraud

A

Prevention/detection

  • Culture of honesty and ethical behaviour
  • Establishing sound system of internal controls
  • Policies implemented to ensure as far as possible efficient conduct
111
Q

Responsibilities of auditor in relation to fraud

A

Be aware of possibility of misstatement due to fraud

112
Q

2 types of law/regulation

A
  • Affect FS indirectly but fundamentally

- Direct material effect on balances in FS

113
Q

Business risk definition and 3 categories

A

Risk inherent to entity in it operations

Financial
Operational
Compliance

114
Q

Financial risk definition

A

Risk arising from financial activities/consequences of an operation

115
Q

Operational risk definition

A

Risk arising with regard to operations

116
Q

Compliance risk definition

A

Risk arising from non-compliance with laws/regulations

117
Q

Audit risk definition

A

Risk auditors give inappropriate opinion on FS

118
Q

Audit risk formula

A

Inherent risk x control risk x detection risk

119
Q

Inherent risk definition and examples

A

How likely balance/transaction will be wrong giving rise to material misstatement in FS

Industry
Entity

120
Q

Control risk definition

A

How likely misstatement will not be prevented/detected by internal controls

121
Q

Detection risk definition

A

How likely audit procedures will not detect material misstatement

122
Q

Procedures to carry out for risk assessment

A
  • Enquiries of management
  • Analytical procedures
  • Observation/inspection
123
Q

Significant risk definition

A

Risk of material misstatement that in auditors judgement requires special audit consideration

124
Q

Audit documentation examples

A
  • Discussion regarding susceptibility to misstatement
  • Key elements of understanding entity
  • Identified/assessed risk of material misstatement
  • Risks identified and related controls evaluated
  • Responses to addressed risk
  • Nature/extent/timing procedures
  • Conclusions regarding evidence from previous audits
125
Q

Response to risk assessment

A
  • Emphasise to staff need to maintain scepticism
  • Assign additional/more experiences staff to team
  • Use experts/work of internal auditors
  • Provide more supervision on audit
  • Incorporate more unpredictability into audit procedures
126
Q

Sources of audit confidence (ISA500)

A
  • Tests of controls
  • Tests of details
  • Analytical procedures
127
Q

Specific guidance on audit procedures relates to (ISA501)

A
  • Attendance at inventory counts

- Litigation/claims

128
Q

Audit procedure examples (AEIIOU)

A
  • Analytical procedures
  • External confirmation
  • Inspection of assets/documentation
  • Inquiry
  • Observation
  • Recalculation/reperfromance
129
Q

Tests of control required when (ISA330)

A
  • Intending to rely on controls to reduce audit risk

- Unable to derive sufficient evidence for substantive procedures

130
Q

Substantive procedures must be carried out on

A

Material items

131
Q

Substantive procedures examples

A
  • Test of details (transactions/balances)

- Analytical procedures

132
Q

Sufficient appropriate audit evidence obtained through

A

Substantive testing

133
Q

Substantive procedures purpose

A

Detect material misstatement in FS

134
Q

2 types of directional testing

A 
Errors = start in accounting records
Omissions = start outside of accounting records
135
Q

Model for audit plan

A
  • Agree opening balances to last years working papers
  • Review general ledger for unusual transactions
  • Check client schedule to/from accounting record/FS
  • Carry out analytical review
  • Test transactions in detail
  • Test balances in detail
  • Review presentation/disclosure in FS
136
Q

Analytical procedures - comparison examples

A
  • Similar information from prior periods
  • Anticipated results/budgets
  • Industry information
137
Q

Analytical procedures - relationship examples

A
  • Elements of FS expected to conform to patterns

- Links between financial/non-financial info

138
Q

Analytical procedures - sources of info

A
  • Interim financial info
  • Budget/management accounts
  • Non-financial info
  • Bank records
  • VAT returns
  • Board minutes
  • Discussions with directors
139
Q

Assessing internal audit - objectivity considerations

A
  • Status of function within entity
  • Who they report to
  • Conflicting responsibilities/restrictions
  • To what extent management acts on internal audit recommendations
140
Q

Assessing internal audit - competence considerations

A
  • Adequate resources/technical training/proficiency
  • Posses required knowledge of financial reporting
  • Whether internal auditors members of professional bodies
141
Q

Assessing internal audit - systematic and disciplined approach considerations

A
  • Internal audit is properly planned/supervised/reviewed/documented
  • Quality control procedures in place
  • Audit manuals/work programmes/documentation
142
Q

Types of internal audit work

A
  • Testing effectiveness of controls
  • Substantive procedures involving limited judgement
  • Observations of inventory counts
  • Tracing transactions through info system relevant to financial reporting
  • Testing of compliance with regulatory requirements
  • Audits/reviews of financial information of subsidiaries
143
Q

Evaluating specific internal audit work

A
  • Work was properly planned/performed/supervised/reviewed/documented
  • Sufficient/appropriate evidence obtained to enable internal auditors to draw reasonable conclusions
  • Conclusion reached are appropriate/consistent with work performed
144
Q

Auditor’s expert work examples

A
  • Valuations of complex financial instruments
  • Actuarial calculations
  • Estimation of oil/gas reserves
  • Valuation of environmental liabilities
  • Interpretation of contracts/laws/regulations
  • Analysis of complex tax compliance
145
Q

Component definition

A

Entity whose FS is included in group FS

146
Q

Component auditor definition

A

Auditors who perform work on FS related to component of group audit

147
Q

Group engagement team definition

A

Auditors with responsibility for performing work on consolidation process/communicating with component auditors/reporting on group FS

148
Q

Group engagement partner responsible for

A
  • Understanding component auditor
  • Responding to assessed risks
  • Communication with component auditor
  • Evaluating sufficiency/appropriateness of evidence obtained
149
Q

Types of accounting estimates (ISA540)

A
  • Inventory obsolescence
  • Depreciation
  • Valuation of financial instruments
  • Pending litigation outcome
  • FV goodwill/intangibles
  • Impairment of HFS assets
  • Non-monetary exchanges
  • Revenue recognised for long-term contracts
150
Q

Audit considerations for accounting estimated

A
  • Method used
  • Relevant controls
  • Whether management has used expert
  • Underlying assumptions
  • Change in method from prior period
  • Effect of estimation uncertainty
151
Q

Practical issues in audit strategy

A
  • Selecting right audit team
  • Budgets/deadlines
  • Timing on interim/final audits
  • Location of client premises
  • Nature of evidence required
152
Q

Charity accounts may include

A
  • Statement of financial activities (SOFA)
  • Income/expenditure account
  • Balance sheet showing assets/liabilities/funds
  • Cash flow statements
  • Notes
153
Q

Charity audit problem areas

A
  • Donations not supported by invoices
  • Legacies income recognition
  • Grants often subject to conditions
  • Restricted funds can only be used as per deed
  • Grants to beneficiaries must be bona fide
  • Branches - charities’ SORP requires inclusions in main accounts
154
Q

Charity audit planning

A
  • Scope of audit
  • Recommendations of charity regulators
  • Accounting policies
  • Changes in sector of operation
  • Past experience of system
  • Key audit areas
  • Detail in FS
  • Risk
155
Q

Charity audit inherent risks

A
  • Complexity/extent of regulation
  • Significance of donations and cash receipts
  • Lack of predictable income
  • Restricted funds
  • Restrictions imposed by charity’s governing documents
  • tax rules
  • Sensitivity of key statistics
  • Balance of maintaining resources/building up funds
156
Q

Charity audit control risks

A
  • Time committed by trustees
  • Degree of involvement by trustees
  • Independence of trustees from each other
  • Division of duties (very key for charities!)
157
Q

Charity 2 key internal control problems

A
  • Lack of segregation of duties

- Use of unqualified staff

158
Q

Controls for charity collection tins

A
  • Numerical control over tins
  • Satisfactory sealing of tins
  • Regular collecting/recording of proceeds
  • Dual control over counting/recording proceeds
159
Q

Controls for charity postal receipts

A
  • Unopened mail kept securely
  • Dual control over opening of mail
  • Immediate recording of donations on opening mail
  • Agreement of bank paying-in slips to record receipts
160
Q

Charity audit evidence needed about

A
  • Understatement/incompleteness in income
  • Overstatement of grants/assets
  • Analysis/misuse of funds
  • Misstatement of assets like donated property
  • Existence of restricted funds in foreign branches
161
Q

Charity audit review

A
  • Consider if accounting policies are appropriate
  • Analytical procedures might be restricted due to lack of predictable income
  • Budget/strategy info should be available
162
Q

Charity audit reporting

A
  • Conform to ISA700

- Refer to charities legislation in report

163
Q

Principles of public sector audit

A
  • Accountability for public funds
  • Independence of auditors
  • Wide scope of audit
  • Results of audit available to public
164
Q

Features of public sector audit

A
  • FS
  • Internal controls
  • Regularity
  • Propriety
  • Value for money
165
Q

Public sector audit value for money 3 Es

A 
Economy = spend less
Efficiency = spend well
Effectiveness = spend wisely
166
Q

Internal audit definition

A

Independent/objective assurance and consulting activity designed to add value and improve organisation’s operations

167
Q

Code of ethics for internal auditors in public sector

A
  • Integrity
  • Objectivity
  • Confidentiality
  • Competency
168
Q

Public sector internal audit standards (PSIAS) 2 general headings

A
  • Attributable (purpose of IA/independence/proficiency/quality assurance)
  • Performance (management/planning/performance/communication/monitoring)
169
Q

Issues with review of compliance with Companies Act

A
  • Large number of financial reporting standards
  • Act is large document itself
  • Directors report need to be consistent with FS
170
Q

Steps to form overall conclusion

A

1) Interpretation - of figures/ratios in FS
2) Investigation - potential problems identified
3) Corroboration - where further work is needed/amendments to FS actioned

171
Q

Auditors responsibilities for going concern

A

Obtain sufficient appropriate evidence regarding appropriateness of management’s use of going concern assumption

172
Q

Procedures to check going concern

A
  • Future business plans/forecasts
  • Adequacy of borrowing facilities
  • Minutes
173
Q

Opinion when GC assumption appropriate but material uncertainty exists and is adequately disclosed

A

Unmodified opinion with material uncertainty related to going concern paragraph (ISA570)

174
Q

Opinion when GC assumption appropriate but material uncertainty exists and is INadequately disclosed

A 
Qualified opinion (inadequately disclosed)
Adverse opinion (not disclosed)
175
Q

Opinion when GC assumption inappropriate

A

Adverse opinion

176
Q

Opinion when management unwilling to extend assessment of GC assumption

A

Qualified opinion/disclaimer

177
Q

Adjusting events

A
  • Resolution of court case
  • Bankruptcy of customer
  • Evidence of NRV of inventories
  • Discovery of fraud
178
Q

Non-adjusting events

A
  • Destruction of asset by flood/fire
  • Major share transactions
  • Announcement of plans to close part of business
  • Dividends proposed after end of reporting period
179
Q

Audit procedures for subsequent events

A
  • Enquires of management
  • Reading minutes of meeting with those charged with governance
  • Reviewing most recent financial information
180
Q

Example enquires of management for subsequent events

A
  • What is the status of items involving subjective data?
  • Are there new commitments in new year?
  • Have there been any issues of capital?
  • Have there been any major events?
  • Are there any unusual treatment adjustments?
181
Q

Matters to be communicated to those charged with governance (ISA260)

A
  • Auditors responsibilities in relation to FS audit
  • Planned scope/timing of audit
  • Auditors independence
  • Significant findings on qualitative aspects
  • Difficulties encountered
  • Significant matters discussed with management
182
Q

Matters to communicate regarding internal control deficiencies (ISA265)

A
  • Likelihood of material misstatement
  • Susceptibility to loss/fraud
  • Amounts/volumes/importance of control to financial reporting
183
Q

Opinion when accounts give true and fair view

A

Unmodified audit opinion

184
Q

Opinion when accounts give true and fair view except for matters that are materially misstated

A

Qualified audit opinion

Accounts give true and fair view excepts for the effects of the material misstatement

185
Q

Opinion when accounts do not give true and fair view because misstatements are materials and pervasive

A

Adverse audit opinion

186
Q

Opinion when accounts give true and fair view but auditor cannot tell whether true and air view is given in respect of materials items due to inability to obtain evidence

A

Qualified audit opinion

Accounts give true and fair view excepts for the possible effects of the matter

187
Q

Opinion when auditor cannot tell whether true and fair view is given at all due to inability to obtain evidence

A

Disclaimer of opinion

188
Q

Emphasis of matter paragraph when

A

FS affected by fundamental uncertainty

Auditor will not modify opinion

189
Q

8 steps to form audit opinion

A

1) Read requirement
2) Read through info in question
3) Ascertain whether all evidence expected has been obtained
4) If not, identify effect of not having evidence
5) Ascertain whether FS prepared with GAAP
6) If not, determine whether departure was required and properly disclosed
7) Decide whether unnecessary departure is material to FS (qualified) or pervasive (adverse)
8) Conclude whether true and fair view

190
Q

Contents of auditors report (ISA700)

A
  • Title
  • Addressee
  • Auditor’s opinion
  • Basis for opinion
  • Going concern
  • Key audit matters
  • Other info
  • Responsibilities for FS
  • Auditors responsibilities
  • Other reporting responsibilities
  • Name of engagement partner
  • Signature of auditor
  • Auditors address
  • Date
191
Q

Merits of auditors report

A
  • Clearly spells out to whom report is addressed
  • Clearly states FS it refers to
  • Refers to respective responsibilities of directors/auditors
  • Outlines process of auditing
  • Explains audit opinion
  • Opinion is prominent at start of report improving clarity/understandability
192
Q

Criticisms of auditors report

A
  • Not clear to non-financial investors
  • Includes audit jargon
  • Description of audit is unclear
  • Extent of management responsibility not clear
193
Q

Items for engagement letter of other assurance engagement

A
  • Intended use of info
  • Whether info will be for general/limited distribution
  • Nature of assumptions (best-estimate/hypothetical)
  • Elements to be included in info
  • Period covered by info
  • Caveat there could be differences between forecast and actual performance due to unforeseen circumstances
194
Q

Companies that must have audit regardless of size

A
  • Banking/insurance markets
  • Shareholders of at least 10% request one
  • Articles of association require audit
  • Non-dormant public companies
  • Member of group including one of the above (subs exempt if parent guarantees liabilities of sub)
195
Q

FRC standard 1 - integrity/objectivity/independence

A
  • Stresses independence
  • Ethic partner appointment
  • Policies/procedures to comply with standards
196
Q

FRC standard 2 - relationships

A
  • Financial interest not permitted
  • Audit staff joining client (partner) = resign
  • Audit staff joining client = consider team
  • Client joining auditor = excluded for 2 years
  • Auditor loaned to client = short period/no management decisions
197
Q

FRC standard 3 - long association

A
  • Listed engagement partner = 5 years/7 years no return 5 years
  • Listed key audit partner = 7 years no return 2 years
  • Become listed = continue for 2 years if less than 4 years already
  • Non-listed engagement partner = 10 years
198
Q

FRC standard 4 - fees

A
  • Contingent fees not allowed
  • Listed = disclose 5-10% not exceed 10%
    Non-listed = disclose 10-15% not exceed 15%
199
Q

FRC standard 5 - non-audit services

A

Internal audit = not if relying on work
IT = not if relying on systems
Valuation = not when subjective/material
Acc prep = not for listed unless emergency
Tax = cannot represent in tax tribunal/no calcs for listed
Remuneration = prohibited
Recruitment = contribute informally

200
Q

Hot review when/who/why

A

Before sign off
High risk client
Prevent inappropriate opinion

201
Q

Cold review when/who/why

A

After sign off
Sample of clients
Identify breaches in QC procedures so corrective action can be taken

202
Q

External quality review firm for listed audits

A

FRC

203
Q

External quality review firm for non-listed audits

A

ICAEW

204
Q

Contents of tender document

A
  • Quality of service
  • Experience and industry knowledge
  • Proposed audit team members
  • Fees
205
Q

Acceptance factors

A
  • Risk analysis
  • Ethical issues (contacting outgoing)
  • Legal issues (removal of outgoing)
  • Practical issues (location)
206
Q

Materiality guide - directors

A

Material in nature

207
Q

Materiality guide - related parties

A

Material in nature

208
Q

Materiality guide - £1

A

Material in nature if turns profit into loss/affects SME status

209
Q

Benefits of analytical procedure for risk assessment

A
  • Uses info outside accounting records
  • Identifies items detailed test may miss
  • Allows comparison of different sources
  • Efficient
210
Q

Limitations of analytical procedure for risk assessment

A
  • Good knowledge of business needed to understand results
  • Consistency of results may conceal material error
  • tendency to carry out procedures mechanically
  • Reliable data may not be available
211
Q

Profit % formula

A

(Profit / revenue) *100

212
Q

Current ratio formula

A

Current assets : current liabilities

213
Q

Trade receivables days formula

A

(Receivables / revenue) *100

214
Q

Trade payables days formula

A

(Payables / purchases) *100

215
Q

Assurance engagement definition

A 
Practitioner aims to obtain
Sufficient audit evidence
Express a conclusion
Enhance degree of confidence
Intended users other than responsible party
About subject matter
216
Q

Audit definition

A

Auditor expresses opinion
Financial statements prepared
In all material respects
In accordance with reporting framework

217
Q

Work undertaken for review of FS (ISRE2400)

A

Inquiry

Analytical procedures

218
Q

Work undertaken for review of prospective information (ISAE3400)

A

Assessment of assumptions
Re-computation
Written representations

219
Q

Work undertaken for audit (ISA500)

A 
Inspection
Observation
External confirmation
Recalculation
Re-performance
Analytical procedures
Inquiry
220
Q

Benefits of being audited

A
  • Scrutiny by another set of professional eyes
  • Provides assurance to third parties
  • Growing businesses will one day require one
  • Auditors recommend improvements in system
221
Q

Responsibilities of assurance provider determined by

A
  • Legislation/regulation
  • Terms of engagement (engagement letter)
  • Ethical/professional standards
  • Quality control standards
222
Q

Difference between error and fraud

A

Intention

223
Q

Rights of removed auditors

A
  • Receive notice
  • Attend meeting
  • Written representation circulated to members
224
Q

Type of resolution for auditor appointment

A

Ordinary

225
Q

Type of resolution for auditor removal

A

Ordinary with special notice

226
Q

Opinion shopping definition

A

Getting second audit opinion

227
Q

Control activities

A
  • Authorisation
  • Performance reviews
  • Information processing
  • Physical controls
  • Segregation of duties
228
Q

Components of internal control

A
  • Control environment
  • Risk assessment process
  • Information systems
  • Control activities
  • Control monitoring
229
Q

Stages related party work is required

A
  • Planning
  • Detailed work stage
  • Review stage
230
Q

Kingman review recommendation

A

Replace FRC with ARGA

231
Q

Brydon review

A

Feedback during 2020

232
Q

4 main causes of audit failure

A
  • Failure to assess audit risk properly
  • Failure to respond appropriately to audit risk
  • Failure to recognise and respond to situation where auditor’s objectivity is threatened
  • Failure to recognise and respond to situations beyond auditor’s area of competence
233
Q

Procedures to obtain info (AEIOU)

A 
Analytical procedures
Enquiry of management
Inspection
Observation
RecalcUlation
234
Q

Matter discussed in engagement team meeting

A
  • Where control systems are weak
  • How management could perpetrate fraud
  • Earnings management
  • Internal//external factors as incentives
  • Management overseeing of employees with access to cash
  • Unusual/unexplained lifestyle changes
  • Need for professional scepticism
  • Type of circumstance that could lead to fraud
  • Unpredictability incorporation
  • What audit procedures are responsive to fraud
  • Allegations of fraud
235
Q

FRC practice notes

A

Assist auditor in applying ISAs
Persuasive not prescriptive
Indicative of good practice

236
Q

Firm quality control controls

A
  • Planning/supervision/review procedures
  • Hot/cold file reviews
  • Regulatory inspections
  • Segregation of duties
  • Rotation
  • Info barriers
237
Q

FRC ethical standard engagement team composition

A
  • Engagement partner
  • Independent partner
  • Other key partners
  • Audit staff
238
Q

Limitations of internal control

A
  • Cost > benefit
  • Non-routine transactions
  • Human error
  • Management override
  • Collusion
  • Changes in procedures
239
Q

Global standards developed by

A

IFAC

International federation of accountants

240
Q

Audit sub-committee of IFAC

A

IAASB

International auditing and assurance standards board

241
Q

Standards in the UK set by

A

FRC

Financial reporting council

242
Q

FRC committees

A
  • Codes and standards = actuarial/audit/governance
  • Conduct = audit quality/discipline/oversight
  • Executive = day-to-day oversight of work of FRC
243
Q

Audit committee duties

A
  • Review/monitor external auditor’s independence and the effectiveness of the external audit process
  • Monitor the work of internal audit (KPIs)
244
Q

KYC client identification rules

A

Check client identity and keep for 6 years after cessation

AA (2 decks)

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