Topic 1

Question 1

What are the elements to an assurance engagement?

There are 5 (Acronym CREST)

Answer 1

CREST

Criteria
Report
Evidence
Subject Matter
Three separate parties

Question 2

who are the three separate parties

Answer 2

Intended user
responsible party
practitioner

Question 3

who is the intended user

Answer 3

The intended user who is the person who requires the assurance report.

Question 4

who is the responsiblle party

Answer 4

The responsible party, which is the organisation responsible for preparing the subject matter to be reviewed.

Question 5

who is the practitioner

Answer 5

The practitioner (i.e. an accountant) who is the professional who will review the subject matter against the suitable criteria and provide the assurance.

Question 6

what is the subject matter

Answer 6

The subject matter is the INFORMATION that the *responsible party has prepared which is being examined and verified

Question 7

what is the criteria and what is compared against this

Answer 7

Suitable criteria are required in an assurance engagement.

The subject matter is compared to the criteria in order for it to be assessed and an opinion provided.

Question 8

what is evidence

Answer 8

Evidence has to be obtained by the practitioner in order to give the required level of assurance and to provide a basis for the conclusion

Question 9

what is an assurance report and who is it given to

Answer 9

An assurance report is the conclusion/opinion that is given by the practitioner to the intended user and the responsible party.

Question 10

what is the objective of an audit?

3 things

Answer 10

The objective of an audit is for the auditor to express an opinion as to whether the financial statements are fairly presented, i.e. that they

✓ show a true (accurate) and fair (unbiased) view;
✓ have been prepared in accordance with ‘specific legislation’ (this will vary internationally).
✓ materially correct.

(This implies that either accounting standards have been complied with or that non-compliance with the accounting standards was necessary in order to show a true and fair view.)

Question 11

what does true mean

there are three factors to it

Answer 11

Information is factual and conforms with reality in that there are no factual errors.

In addition, it is assumed that to be true it must comply with accounting standards and any relevant legislation.

Lastly true includes data being correctly transferred from accounting records to the financial statements.

Question 12

what does fair mean in terms of data

Answer 12

Fair – Information is clear, impartial, and unbiased, and also reflects plainly the commercial substance of the transactions of the entity.

Question 13

what does materiality mean

Answer 13

Materiality is an error or misstatement that will influence the user’s decision.

Question 14

what are the benchmarks for Revenue, Profit before tax and Net assets

Answer 14

Revenue 0.5%-1%
PBT 5%- 10%
Net assets 1% - 2%

Question 15

what is the purpose of an audit

Answer 15

to give users confidence in the statements and reduce the risk of fraud and error

not 100% guarantee but reasonable assurance

Question 16

what is accountability

Answer 16

This is where people in positions of power can be held to account for their actions, i.e. they can be compelled to explain their decisions and can be criticised or punished if they have abused their position.

Directors are accountable to the shareholders for the decisions they make in relation to the company

Question 17

what is the definition of stewardship and a steward

what is the relationship also known as?

Answer 17

Stewardship is the responsibility to take good care of resources. Known as fiduciary relationship

A steward is a person entrusted with management of another person’s property, for e.g.
- Directors are the stewards of the company. They are required to produce the financial statements giving an account of their stewardship

Question 18

what is an agency relationshp

Answer 18

The Agency relationship occurs when one party, the principle, employs another party, the agent, to perform a task on their behalf. For example the directors act on behalf of the shareholders.

Directors are agents of the shareholder
external auditors are agents of the shareholder

Question 19

when comparing reasonable/positive assurance vs Negative/Limited what things can you talk about

5things

Answer 19

Confidence in users
Opinion
Scope 
Law
Report to

Question 20

what is the difference between reasonable/positive assurance vs Negative/Limited for opinion

Answer 20

Gives a report in the form of a positive statement of opinion:

“In our opinion the financial statements shows a true and fair view”-

VS

Gives a report in the form of a negative statement of conclusion:

“In our opinion nothing has come to our attention”

i.e. provides moderate/limited level of assurance ensuring that there is enough info to make it sound plausable

Question 21

what is the difference between reasonable/positive assurance vs Negative/Limited for scope and law

Answer 21

Scope of work governed by the law. Carry out in accordance with ethics, ISAs

vs

Scope of work decided by parties involved
Carry out in accordance with ethics, maybe other guidance

Question 22

what is the difference between reasonable/positive assurance vs Negative/Limited for who they report to

Answer 22

report to members

vs

Report to party who engaged

Question 23

what are some of the advantages of having an audit

Answer 23

HIRED

Helps improve quality and reliability of information

Independent scrutiny- i.e. confirmation to directors of profit

Reduces risk of management bias, fraud and error compliance with accounting standards

Enhances credibility to financial information

Deficiencies in internal controls are highlighted/recom

Question 24

what are some of the disadvantages of having an audit

FIRED acronym

Answer 24

FIRED

Financial statements include subjective estimates and other judgmental matters.

Inherent limitations if relied on Internal controls

Representations from management not reliable (when they’re the only source of evidence in some areas)

Evidence is often persuasive not conclusive

Do not test all transactions and balances. Auditors test on a sample basis.

Additionally, cost and also time taken away from your BAU as you have to give them what they’re asking for

Question 25

what is the purpose of an assurance

Answer 25

To increase the confidence of the user in the subject matter being relied on

Question 26

For LIMITED audit, the practitioner: Gathers sufficient appropriate evidence to..?

Answer 26

Gathers sufficient appropriate evidence to be satisfied that the subject matter is plausible in the circumstances

Plausible: An explanation or statement that is plausible seems likely to be true or valid/able to be believed

Question 27

what are some expectations gap

Answer 27

Auditor tests everything
auditor detects all fraud and error
auditor confirms the company is a going concern
auditor prepares the FS