Week 4 Flashcards
contigent fees’ safeguard = ?
fees based on the level of profits of the company aren’t allowed
compensation/evaluation safeguard = ?
audit partner can’t be evaluated on/compensated based on success in selling non audit services to the client
litigation safeguard = ?
- discuss with audit committee
- obtain external review
- withdraw from assignment
familiarity = ?
auditor becomes sympathetic to/trusting of a client & no longer applies professional scepticism
(e.g., long association, personal relationships, movement of staff between firm and client)
long association safeguard = ?
- if not a public company, rotate partner
- if it’s a public company, audit must be put up for bidding against other firms every 10 years
- audit partner must also be rotated every 7 years
family association safeguard = ?
remove the individual from the audit team if they’re associated through family
advocacy = ?
promoting the position of the client or representing them in some way
(representing, promoting & negotiating on behalf of the client)
self review = ?
auditor will be unlikely to admit to errors or trace errors in their work
relates to accounts preparation, internal audit, tax computations
auditor must keep confidentiality in all situations except ones where…
- disclosure is permitted by law & authorised by the client
- disclosure is required by law
- there’s a professional duty/right to disclose
when does conflict of interest arise?
when the same audit firm is used for 2 companies that interact with each
other
(either competitors or trade with each other)
firms work must be arranged to ensure neither party is negatively impacted & confidentiality isn’t breached
all parties must be notified & consent must be given prior to action
it’s advised, that for conflict of interest situations, the following measures take place…
- separate engagement teams are used
- procedures put into place to prevent information leakages
- engagement teams sign confidentiality agreements
- independent partner reviews safeguards
if adequate safeguards can’t be put into place to protect conflict of interest…
firm must decline or resign from one or more of the audit assignments
auditors should only accept a new client if…
the risk of the assignment is at an appropriate level
what must audit firms consider before auditing a company?
- professional competence
- fees
- client reputation
- professional clearance*
- preconditions for an audit*
how should ‘professional clearance’ and ‘preconditions for an audit’ be treated?
they are two considerations an audit firm should revisit annually
the prospective firm should… prior to auditing a company?
- ask the client for permission to contact the outgoing auditor
- outgoing auditor should also ask the client for permission
- if the client refuses permission, the outgoing firm should notify the new one
safeguard to ‘recruitment’ threat to independence?
if the company’s a plc, the audit firm can’t provide recruitment services for directors and senior management (if in a position to affect the financial statements)
professional clearance = ?
speaking to the previous auditors
auditors should only accept a new audit engagement if which preconditions are met?
- check FSs reporting framework is appropriate (international/national standards)
- ensure management understand and accept their responsibilities
management’s responsibilities in a company that should be acknowledged prior to an auditor accepting the audit engagement?
- to prepare FSs using appropriate framework
- ensure internal controls are in place to prevent material misstatements
- provide auditors with access to relevant information to conduct an effective audit
engagement letter = ?
details the nature of the contract between audit firm and client which must be signed before the audit starts
what’s the purpose of an engagement letter?
- minimise risk of misunderstandings
- confirm acceptance of the audit
- sets out the terms & conditions of the engagement
main contents of an engagement letter?
- objectives and scope
- responsibilities
- financial reporting framework
- form & content of reports
- basis of fees
- reference to professional standards
- need for a written representation letter
- limitations of an audit
how often should the engagement letter be reviewed?
annually
when should a new engagement letter be issued?
if the scope or the context of the assignment has changed; e.g.,
- change of statutory duties due to legislation change
- change in professional duties due to change in auditing standards
- changes to other services requested by the client
when may the auditor remind the client of the terms of the engagement?
- if senior management has changed
- if there’s a change in the ownership of the client
- client shows they don’t fully understand the terms of the engagement letter
what does an audit engagement always begin with?
- a risk assessment
- a preliminary level of materiality is set
how is risk assessed?
- understanding the entity
- performing analytical review
professional scepticism is important
what does an audit risk model consist of?
audit risk consists of risk of material misstatement and detection risk
risk of material misstatement refers to inherent risk and control risk
detection risk refers to sampling risk and non-sampling risk
audit risk = inherent risk x control risk x detection risk
audit risk = ?
the risk an auditor expresses an inappropriate audit opinion and includes both the risk of material misstatement and detection risk
risk of material misstatement = ?
the risk that the financial statements are materially misstated before the audit starts
inherent risk = ?
the susceptibility of a material misstatement in the financial statements assuming there were no internal controls
control risk = ?
the risk that a material misstatement is not prevented, detected or corrected by the entities internal controls
detection risk = ?
the risk that the audit doesn’t detect a material misstatement and is comprised of sampling risk and non-sampling risk
sampling risk = ?
the risk that the conclusion drawn from the results of a sample aren’t consistent with the conclusion that would have been made had all items been tested
(non representative sample is picked)
non-sampling risk = ?
the risk of drawing the wrong conclusions for other reasons
professional scepticism = ?
a questioning mind, being alert to anything that may indicate a material misstatement and making critical assessments of audit evidence
professional judgement = ?
making informed decisions using knowledge, training and experience
materiality = ?
misstatements, including omissions, are considered to be material if they could reasonably be expected to be impactful on the FSs
materiality is subjective and should be considered in light of the client’s circumstances
how is materiality measured?
the following thresholds are classed as material under ISA 320:
- 1/2 - 1% revenue
- 5 - 10% profit before tax
- 1 - 2% total assets
performance materiality = ?
set at less than the materiality for the FSs as a whole to ensure smaller individual misstatements aren’t ignored when in aggregate they would exceed the materiality threshold
why perform a risk assessment?
- identify risky areas earlier in the audit
- plan procedures to address these risky areas
- to carry out an efficient audit
- to reduce the risk of giving an incorrect opinion
- reduce the risk of reputation damage or fines
risk assessment procedures = ?
- enquiries with management & internal audit function
- analytical procedures
- observation of controls
- inspection of strategic documents
responses to risk assessment = ?
- ensuring we exercise professional scepticism
- using more experience staff to look at complex & risky areas
- ensuring there’s adequate supervision
- increase level of testing and frequency of checks
what must one understand about the entity?
the environment:
- industry conditions
- laws & regulations
- competitive environment
- economic landscape
the company:
- how they operate
- who owns them
- how they’re financed
- what accounting policies they use
- their objectives & strategy
- what internal control systems they use
how to get an understanding of a client?
- manager briefing
- conversation w/ industry experts
- having past experience
- having discussions
- websites
- press articles
- internet search
- industry surveys
what constitutes the characteristics of an audit engagement?
- the FR framework that’s used
- knowledge of industry & business
- work of internal audit team
- areas of finance that are outsourced
- can we make use of CAATs
- availability of key client personnel
CAATs = ?
computer assisted audit techniques
what are significant factors & preliminary engagement activities?
- materiality
- risk assessment (inherent, control & sampling risk)
- internal controls
- need for scepticism
- changes in laws & regulations
- significant developments
what should an audit plan include?
the nature, timing and extent of testing
- what tests should be performed
- who should do the testing
- how much work should be done (sample sizes)
- when should the work be done
