Topic 1 & 2

Question 1

What are the key elements of an assurance engagement?

Answer 1

CREST

Criteria
Report
Evidence
Subject matter
Three party relationship

Question 2

What must an auditor do before accepting an engagement?

Answer 2

MANICS

Management integrity
Adequate resources
Nature of engagement
Identification
Communicate with previous auditor
Stability

Question 3

What makes up the audit risk?

Answer 3

Inherent risk x control risk x detection risk

Question 4

What 4 things are required to be in an engagement letter?

Answer 4

Auditors responsibilities
Directors responsibilities
Scope/ objectives
Report to management

Question 5

What are Analytical procedures?

Answer 5

Evaluation of financial info through study of financial and non financial data. E.g. ratio analysis

Question 6

How do you work out return on capital employed?

Answer 6

PBIT divided by equity + debt

Question 7

How do you work out return on shareholders funds?

Answer 7

Net profit for period divided by share capital + reserves

Question 8

How do you work out operating cost percentage?

Answer 8

Operating costs/ overheads divided by revenue times 100

Question 9

What is the current ratio?

Answer 9

Current assets: current liabilities

Question 10

How do you work out quick ratio?

Answer 10

Receivables + current investments + cash : current liabilities

Question 11

How do you work out gearing ratio?

Answer 11

Net debt divided by equity

Question 12

How do you work out interest cover?

Answer 12

Profit before interest payable divided by interest payable

Question 13

How do you work out net asset turnover?

Answer 13

Revenue divided capital employed

Question 14

How do you work out inventory turnover?

Answer 14

Cost of sales divided by inventory?

Question 15

How do you work out inventory days?

Answer 15

Inventory divided by cost of sales times 365

Question 16

How do you work out trade receivables days?

Answer 16

Trade receivables divided by revenue times 365

Question 17

How do you work out trade payables days?

Answer 17

Trade payables divided by credit purchases times 365

Question 18

What Is detection risk?

Answer 18

Risk that the procedure is performed by the auditor to reduce risk will not detect a missstatement

Question 19

What does ISA stand for?

Answer 19

International standards of Auditing

Question 20

What are the guideline materiality levels for PBT, revenue and total assets?

Answer 20

PBT 5-10%
Revenue 1/2 - 1%
Total assets 1-2 %

Question 21

What classes give a material amount regardless of the monetary amount?

Answer 21

Directors loan

Related party transactions

Question 22

What is the purpose of an engagement letter?

Answer 22

Define responsibilities

Provide written confirmation

Question 23

What is business risk?

Answer 23

A risk resulting from significant events that could adversely affect a business’ ability to achieve its objectives and execute its strategies.

Question 24

What are the types of control activity?

Answer 24

SPIRA

Segregation of duties
Physical controls
Information processing 
Review of performance
Authorisation

Question 25

How should an auditor gain an understanding of internal controls?

Answer 25

Enquiry, inspection and observation