Topic 5 Audit and Internal Control

Question 1

What are the steps in the financial reporting process? (3)

Answer 1

1. Preparation of financial statements
2. Approval of financial statements
3. Assurance of financial statements

Question 2

What are Management’s responsibilities? (4)

Answer 2

o Prepare financial statements
o Prepare the entire financial report
o Make Subjective Judgements about:
- Measurements (assets and liabilities, revenues, and expenses)
- Which transactions are recognised

Question 3

What are the responsibilities of the Board of directors? (3)

Answer 3

o Approves financial statements
o Legally responsible for the financial statements
o Acts as the go between Shareholder’s(principal) and Management(agent)

Question 4

What is the responsibility of the External Auditor? (3)

Answer 4

o Verify financial statements are in accordance with GAAP and Corporations Act 2001
o Must remain independent, unbiased and professional
o Ensure credibility of the financial statements

Question 5

What is an Audit

Answer 5

Independent verification that managers have correctly applied accounting rules in the preparation of financial statements

Question 6

What is an Auditor

Answer 6

An Independent party, who is unbiased and can provide a professional opinion on the credibility of financial statements, based on Applicable accounting standards ( Corporation Act 2001, GAAP, etc)

Question 7

What is Agent Theory?

Answer 7

Maintaining a Principal and Agent Relationship

Question 8

What is an Agent? Provide example

Answer 8

Person who does something and is compensated (i.e. Management)

Question 9

What is a Principal? Provide Example

Answer 9

Person who wants something done (i.e. Owners/Shareholders)

Question 10

How do companies get away with falsifying there financial statements?

Answer 10

Collusion between the board of directors and management

Question 11

What standards do financial statements have to meet (3)

Answer 11

o the Corporation Act 2001,
o GAAP
o other professional mandatory reporting requirements.

Question 12

What are the types of audit opinions?(4)

Answer 12

• Un-Qualified
• Qualified
• Adverse
• Disclaimer

Question 13

What is a Unqualified opinion?

Answer 13

• Find no problems with the preparation of financial statements

Question 14

What is a Qualified Opinion?

Answer 14

• Issued when the financial statement has been prepared correctly except for a small section where it is believed the accounting standards have not been interpreted correctly

Question 15

What is a Adverse Opinion?

Answer 15

• Issued when management has not correctly applied accounting standards in preparation of financial statements, and the information cannot be relied on

Question 16

What is a Disclaimer Opinion?

Answer 16

• When not able to obtain sufficient and appropriate evidence to support the preparation of financial statement

Question 17

What issues cause disclaimer opinions? (3)

Answer 17

o Lack of documentation of accounting transactions
o Management did not allow the auditors access
o Key Information loss or damaged

Question 18

What are the threats to Auditor’s Independence?(5)

Answer 18

• Self-interest threats
• Self-review threats
• Advocacy threats
• Familiarity threats
• Intimidation threats

Question 19

What are Self-interest threats

Answer 19

o Financial opportunity may influence the auditors professional opinion

Question 20

What are Self-review threats

Answer 20

o Auditor reviewing their own past work

Question 21

What are Advocacy threats

Answer 21

o Promoting a client’s position or interest (consultancy) whilst also auditing their financial statements

Question 22

What are Familiarity threats

Answer 22

o Building relationships with management within the business the longer you audit for them, becoming more sympathetic and trusting

Question 23

What are Intimidation threats

Answer 23

o When the audit client tries to exercise pressure on you to influence the auditors judgement