Week 1: Nature of Auditing & Appointment of Auditors Flashcards
Exp;lain audit vs assurnace?
Audit is Is a subset of assurance engagements.
Focuses only on audit of historical financial information
Assurance Includes:
Audit of historical financial information
Reviews of historical information
Assurance engagements other than audits and reviews of historical financial information.
What is Professional Judgment?
Professional Judgment is A set of skill obtained through application of relevant training, knowledge and experience within the spectrum of auditing, accounting and ethics.
Ability to make an informed decision based on the knowledge and expertise
What is Professional Skepticism?
Professional Skepticismis the Attitude which includes a questioning mind
Involves a critical assessment of evidence
What is the three party relationships?
1) assurance provider e.g audit practitioner
2) responsible party
3) intended users e.g investors, creditors, debtors
What does subject matter mean in auditing?
They are the financial and non-financial information in the financial report which were provided by the responsible party.
Examples
Financial Position and Performance
Non financial performance
Physical characteristics
Systems and processes
Behaviour
What does criteria mean in auditing?
criteria are benchmarks to measure and evaluate the subject matter.
Examples
Accounting standards
Auditing Standards
ASX Recommendations
Corporations Act
What is Sufficient Appropriate Evidence?
It has to have both quality and quantity
quantuty is the The amount of audit evidences which the auditor deem adequate to form an audit opinion on a reasonable basis
quality is made of two parts Relevance and Reliability.
Relevance Covers the association between audit evidences and management assertions in the financial statements
Reliability Emphasises on the source and nature of audit evidences
What is the Written Assurance Report?
Written Assurance Report is a Written conclusion drawn by the audit practitioner and It provides a level of assurance on the underlying subject matter.
what are the Fundamental
Principles of Professional
Ethics?
Fundamental Principles of Professional Ethics:
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional
Behaviour
what are Fundamental
Principles
underlying the
objective of an
audit?
Fundamental Principles underlying the objective of an audit:
knowledge
responsibility
quality control
rigour and skepticism
professionall judgement
evidence
documentation
communication
association
reporting
What are the two fundamental characteristics?
the three fundamental characteristics:
relevance
faithful representation
What are the four enhancing characteristics?
the four enhancing characteristics:
1) comparibility
2) verifiability
3) timeliness
4) understanding
What is governance?
Governance is a system by which companies are directed and managed.
what are Professional Ethics ?
Ethics are concerned with the requirements for the general well-being, prosperity, health and happiness of people
What are the five threats to independence?
the five threats to independence:
1) intimidation
2) self interest
3) self review
4) advocacy
5) familiarity
Why do firms change auditors?
firms change auditors because:
Audit fee concerns (too high, not competitive).
Size (client outgrows auditor or vice versa).
Disagreements or ethical reasons.
Conflict of interest.
Personality clashes.
Independence rotation.
What are the ethical restrictions on advertising and obtaining audit work?
Advertising must not bring the profession into disrepute.
No misleading claims or unflattering comparisons.
Cold calling allowed but must follow ethical rules.
Firms can provide free services but must disclose future fees.
Second opinions discouraged without consulting the previous auditor.
What considerations must an auditor evaluate in the tendering process?
Reason for audit tendering.
Feasibility and fee estimation.
Independence/conflict issues.
Management concerns.
Auditor’s technical expertise.
Likelihood of winning the tender.
What is included in an audit tender document?
included in an audit tender document:
Proposed fee and calculation basis.
Audit scope and client requirements.
Audit approach and firm credentials.
Other services offered.
How are audit fees typically structured?
Based on hourly rates and time spent.
Fixed fee arrangements possible.
Percentage/contingency fees not allowed for audits.
Lowballing discouraged due to self-interest risk.
Why must an auditor understand the client’s business?
an auditor must understand the client’s business:
To assess risks of material misstatement.
To ensure compliance with ethical and professional standards.
To evaluate engagement risks.
What are some methods for preliminary client examination?
some methods for preliminary client examination:
Visiting premises.
Reviewing annual reports.
Discussions with management.
Accessing public databases.
Consulting prior auditors (for new clients).
What factors are evaluated during client acceptance?
factors that are evaluated during client acceptance:
Governance and internal controls.
Changes in management or business structure.
Regulatory compliance.
Financial or accounting issues.
Fraud risks (ISA 240 & ISA 315).
Related parties (ISA 550).
Q: Under ISA 210, when should an auditor reject an engagement?
Under ISA 210, an auditor should reject an engagement :
If client imposes restrictions that would require a disclaimer of opinion.
If the engagement threatens compliance with ethical principles.
What factors determine fair professional audit fees?
factors that determine fair professional audit fees:
Skill and knowledge required.
Staff experience and training.
Time required for the audit.
Level of responsibility.
What should be included in an audit engagement letter?
Audit objectives and responsibilities.
Management’s responsibilities.
Financial reporting framework.
Expected form of audit report.
Auditor’s access to records and personnel.
