Topic 5 Audit and Internal Control Flashcards
What are the steps in the financial reporting process? (3)
- Preparation of financial statements
- Approval of financial statements
- Assurance of financial statements
What are Management’s responsibilities? (4)
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
What are the responsibilities of the Board of directors? (3)
o Approves financial statements
o Legally responsible for the financial statements
o Acts as the go between Shareholder’s(principal) and Management(agent)
What is the responsibility of the External Auditor? (3)
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
What is an Audit
Independent verification that managers have correctly applied accounting rules in the preparation of financial statements
What is an Auditor
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)
What is Agent Theory?
Maintaining a Principal and Agent Relationship
What is an Agent? Provide example
Person who does something and is compensated (i.e. Management)
What is a Principal? Provide Example
Person who wants something done (i.e. Owners/Shareholders)
How do companies get away with falsifying there financial statements?
Collusion between the board of directors and management
What standards do financial statements have to meet (3)
o the Corporation Act 2001,
o GAAP
o other professional mandatory reporting requirements.
What are the types of audit opinions?(4)
- Un-Qualified
- Qualified
- Adverse
- Disclaimer
What is a Unqualified opinion?
- Find no problems with the preparation of financial statements
What is a Qualified Opinion?
- 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
What is a Adverse Opinion?
- Issued when management has not correctly applied accounting standards in preparation of financial statements, and the information cannot be relied on
What is a Disclaimer Opinion?
- When not able to obtain sufficient and appropriate evidence to support the preparation of financial statement
What issues cause disclaimer opinions? (3)
o Lack of documentation of accounting transactions
o Management did not allow the auditors access
o Key Information loss or damaged
What are the threats to Auditor’s Independence?(5)
- Self-interest threats
- Self-review threats
- Advocacy threats
- Familiarity threats
- Intimidation threats
What are Self-interest threats
o Financial opportunity may influence the auditors professional opinion
What are Self-review threats
o Auditor reviewing their own past work
What are Advocacy threats
o Promoting a client’s position or interest (consultancy) whilst also auditing their financial statements
What are Familiarity threats
o Building relationships with management within the business the longer you audit for them, becoming more sympathetic and trusting
What are Intimidation threats
o When the audit client tries to exercise pressure on you to influence the auditors judgement
