TOC & Substantive procedures Flashcards
What is management Letter (ML ) & what things should be included in management letter?
A letter sent by the auditor to management that states the weaknesses identified during the audit and their impacts and recommendations is called the management letter
Things to be included:
1- The following weaknesses were identified during the audit which was primarily carried out to give opinion on the f/s
2- The report only states those weaknesses which were identified during the audit. Had a more detailed examination has been carried out, we would have identified more weaknesses
3- The report is only for the sole use of the management. It should not be disclosed to a third party without our consent
4- Thanks to the management for their cooperation
What is Internal Control System?
A system designed by the management and those charged with governance to provide reasonable
assurance about achievement of entity’s objectives about reliability of financial reporting, effectiveness and efficiency of operations etc.
5 Components of Internal Control ?
- Control Environment - Control Activities
- Information System - Monitoring of Controls
- Entity’s Risk Assessment Process
Explanations on Internal Control Handout
Must read there
Limitations of an internal control system?
No matter how strong an entity’s control system is, it only provides reasonable assurance not guarantee due to the following inherent limitations:
1- Cost-effectiveness i.e: cost should not overweigh benefits
2- Potential for Human error
3- Collusion between the employees
4- Management Overrides the controls
5- Controls cope with routine transactions but not with non-routine transactions
2 types of Internal Controls?
General Controls: Controls which are normally present in every system like Passwords, Backups etc
Application Controls: Controls that vary from entity to entity like Security guards in baks
Methods of Documenting Internal Controls and Advantages and disadvantages of each one?
1- Narratives
2- Flow-charts
3- Questionnaires
4- Checklists
Explanation and Advantages and disadvantages on Handout of internal cntrol sysytem
SAAE?
Sufficient appropriate audit evidence
What do you mean by sufficient in SAAE and What are the factors that effect Sufficiency ?
Sufficient refers to the quantity. Audit Evidence should be of sufficient quantity
Factors:
1-The Materiality of item
2-Risk Level of the Item
3-The nature of Accounting & Internal Control System
4-Auditor knows how much of the management
Explanation on Handout
What is appropriateness in SAAE and tell factors that effect appropriateness?
Appropriateness refers to the Quality of the Evidence.
Factors:
1- Audit evidence is more reliable if it is in original form than in photocopy form
2- The written form of audit evidence is more reliable than the oral form
3- Audit evidence is more reliable if it is externally generated than internally generated
4- Directly generated audit evidence by the auditor is more reliable than indirectly generated
Explain Interim and Final Audit?
An auditor performs audit in more than 1 sitting. these are called interim and final audit. Main audit is final audit as audit report is issued at this time. But if ever work is kept for end, the auditor may fall short of time so he performs certain procedures before called interim audit.
Give examples of Interim and Final Audit.
Interim:
1-Evaluating the internal control system of client
2-Performing test of controls to verify clients internal control system is working efficiently
3-Risk assessment of the client
4-Understanding the entity of client
5-Identify the issues which can affect final audit final audit work
Handout pagen 1
Benefits of interim audit.
1- Interim Audit helps completing audit timely and s/h get accounts sooner
2- Interim audit helps identifying problems at initial sage and solving them by adopting specific approach or discussion with management
Why understanding the entity and its environment is important?
Also give Why What and How?
Auditor is required to understand the entity and its environment to perform audit in an effective manner
Why:
To identify and assess the risk of material misstatement in f/s
To properly plan the audit work
What:
try to gather knowledge about:
-Business clients
-Product lines
-Internal Controls
-Hierarchy in the entity
-Industry, regulatory and other external factors
How:
try to gather knowledge through:
-Customers
-Management and employees of entity
-Publications and f/s
-Previous auditors
-Govt/Taxation Authorities
What are financial Assertions and name them?
Assertion means claim.
Whenever management prepares financial statements, they are silently making some claims, these financial claims are called financial assertions.
Financial Assertions:
Accuracy
Existence
Cutoff
Completeness
Valuation
Occurrence
Rights and Obligations
Allocation and Classification
ACCA-OVER Accronym
Explanation in Handout and register S.P topic
Assertions for PnL or Classes of Transactions:
Completeness
Accuracy
Cutoff
Occurrence
Allocation and Classification
Assertions for account balance:
Completeness
Existence
Rights and Obligations
Valuation
Allocation and Classification
Write 5 assertions for sale
Explain 5 assertions for receivables?
Explain why it is important for the auditor to communicate throughout the audit with those charged with Governance?
- It promotes two way communication
- Helps the auditor to obtain information relevant to audit like the risky areas
What matters should auditor communicate with those charged with Governance?
- Any fraud or suspected fraud
- any difficulties faced during audit
-planned audit approach and audit timetable
