tutorial Qs Flashcards
auditors independence in relation to public company
agency theory occurs within public companies. so shareholders are reliant on auditors
auditors independence in relation to private companies with outside interest
management are shareholders usually. auditors ensure no conflict of interest
auditors independence in relation to small company
auditor give an outside perspective
why is an audit necessary?
all companies are required by statute to have an audit
effects of audit on a company
affect the staff, gives shareholders and investors assurance, highlights issues
stages of an audit process
pre engagement planning accounting systems controlling and recording audit programmes performance of the audit reporting
difference between audit engagement partner and ethics partner
looks at audit engagement, planning of audit and threats
vs
looking at ethical policies and procedures, and communication
difference between audit plan and audit strategy
planning an audit involves establishing the overall audit strategy
typical audit engagement acceptance procedure
integrity of client, competency of firm, ethical consideration, communication, issue engagement letter
responsibilities of the auditor
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auditors responsibility in relation to fraud
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principle types of threats to auditors objectivity
self interest self review management advocacy familiarity intimidation
whats included in an audit engagement letter
addressee
terms of engagement
contents of letter
fees and billing arrangements etc
things new auditor discusses with old auditor
reason for leaving
any specific issues
summary of working paper
enquire about companys management
issues you need to examine when taking on a new audit
integrity of management
special circumstances
independence
competency to do audit
plan an audit
business review
evaluate risks
review internal controls
determine strategy
controlling an audit
direction and supervision of managers
role of partners and managers
procedures
documenting audit work
record everything
remove work once its been completed from list
no uneccesary info kept
all working papers confidential
define materiality
a matter is material if its omission or misstatement will reasonable influence the decision of an auditors report
why is materiality important
audit = opinion on truth and fairness of FS
need precision to come to an opinion, material matters take away from this precision
materiality profit
5 - 10% of profit
materiality turnover
0.5 - 1% of turnover
materiality net assets
5 - 10% of net assets
materiality in relation to tests of controls
materiality in regards to certain matters may lead to all of the samples being checked rather than a small amount
materiality in relation to P and L account
looks at turnover / profit materiality
materiality in relation to BS items
looks at net asset materiality
property, plant and equipment risks
ownership, existence, completeness, valuation
PPE ownership
doubts on ownership, forced removals, held in other country
PPE existence
cant do physical inspection, cant access area of PPE (oil rig)
PPE completeness
held in lots of places, p and e produced internally and not capitalised
PPE valuation
cant establish useful life, purchased in fx
revaluation issues
assessing high level audit risk tangible fixed assets
property deeds are susceptible to fraud, difficult to determine asset lives and balance sheet value (as opposed to asset value)
assessing high level audit risk
stock
stock can be moved, stock can affect gross and net profit, difficult to calculate complete stock as it consists of raw materials
assessing high level audit risk trade debtors
may be overstated, inaccurate doubtful debt provisions
assessing high level audit risk
trade creditors
match invoice to records of goods, always need confirmation of goods
assessing high level audit risk
contingencies
confirmation of liabilities may not be available due to pending matters
what is audit risk
the risk the auditors may issue an unqualified opinion on financial statements
advantages of narrative notes
easy to use and understand
disadvantages of narrative notes
not useful with complex controls
advantages of questionaires
easy to prepare, cost effective, simple to complete
disadvantages of questionaies
controls may be misunderstood or misstated
limitations of an audit
ISA 200, inherent limitations, natural of reporting, nature of audit procedures
auditors responsibility to communicate in regards to deficiencies
use written methods to communicate any deficiencies found and in a timely basis
define audit risk
inappropriate opinion on FS
define inherent risk
susceptibility of a misstatement that could be material or combined to be material
define control risk
a misstatement isnt prevented by a control
define detection risk
a misstatement isnt detected by a control
key features of a good internal control system
competent, reliable defined areas of responsibility segregation of duties adequate documents independent checks
procedures usually used to audit internal controls
inspection, observation, enquiries, documents etc
explain mail being opened
ensure mail doesnt go to other employees, ensure mail is accounted for correctly
explain maintenance of a register
reconcile balance on register, attend a physical check of fixed assets, select samples from register
explain bank reconciliation
verify cash book against bank statements, enquire how often bank reconciliations are done, confirm differences have been shown, auditor should reperform reconciliations
explain passwords in an accounting system
observation of password procedure, verification theyve been regularly changed by an authorised official
risk present for cash and remittances in the post
stolen monies at post office, cash handled by too many people, post office handling information isnt given
audit tests for cash and remittances in the post
trace sales records
track money using postal services
print out of lodgements from bank and duplicate company records to find discrepancies
weaknesses in regards to internal control systems of payments to creditors
multiple cheque books, authorisation of payments, who signs cheques, cancelled cheques destroyed
SEVEN AUDIT OBJECTIVES
completeness accuracy valuation cut off existence rights and obligations presentation and disclosure
factors taken into account when assessing reliability of evidence
source, nature, independence of provider, qualifications of provider, reliability in the past, auditors knowledge of area in question
5 audit procedures in regards to P and L
turnover, ensure accuracy
cost of sales, look at cut off procedures
payroll costs, look at payroll accruals
bank interest charge, look at bank statements,
bad debt charge, look at collectability of amounts outstanding
general inherent risks of fixed assets
risk of impairment rising, risk in estimating depreciation or useful life, risk of unused assets and assets in course of construction
use analytical review in fixed assets
compare to budget,
calculate average depreciation, review repairs and maintenance
audit procedures implemented before stock count attendance
contact client for instructions
book staff to attend stock count
ascertain where stock is being held
prepare audit programme for the count
why is observation of physical inventory count essential?
proper cut off depends on physical inventory observation and is so important
what info should the auditor obtain during physical inventory count
sales cut off and purchases cut off
lower of cost and net realisable value
lower of the goods purchase cost adjusted for shipment and handling costs less all further costs the be incurred in the selling and distribution of the cost
errors in stock take
items should be recounted
stock supervisor should be allowed to amend for errors in the system
all amendments should be done by an independent senior person
debtors audit procedures
select sample of debtors and obtain 3rd party confirmation
look at bad debt provisions
update accounting systems for any changes
reconcile debts to the ledger from FS
set out follow up procedures for audit assistant
detailed review of any other procedures taken after year end
set out 3 general considerations for assessing reliability of audit evidence
source of evidence, internal / external
document vs written
authentication method, fax vs email
audit objectives in relation to creditors
liabilities are accurate,
contingent liabilities are properly treated
adequate provision has been made
procedures in regards to creditors
review of liabilities, confirmations or letters
review legal solicitors letters
post balance sheet reviews
purpose of audit procedures in relation to suppliers
existence, rights and obligations, valuation, occurrence and completeness
what is sufficient evidence?
quantity of evidence, enough to form an opinion
what is appropriate evidence?
relevance and reliability, secure enough to come to an opinion
audit procedures regarding going concern
key financial ratios pending major legal procedures net liability position arrears or dividends inability to obtain new financing
auditors responsibilities, period end to auditors report
obtain sufficient evidence, non adjusting events should be disclosed, add adjusted events adjusted
auditors responsibilities, auditors report to financial statements
auditors dont have responsibility to do anything once their reports published
establish any amendments
discuss with directors
consider implications upon the report
auditors responsibilities, financial statements to presentation to members
auditors have no obligation to do anything
consider amendments, discuss matters and discuss whether issues occurred before or after the auditors report
analytical advantages
cost effective, helps with comparisons
analytical disadvantages
doesnt taken into account adjustments
example of analytical
comparing financial ratios
looking at trends etc
