Week 4 - Audit Evidence& Risk Based Approach

Question 1

Letter of engagement

Answer 1

Both parties must agree on the scope and the terms and conditions of the audit And both must sign
This reduces the risk of misunderstanding at later rate

Question 2

Letter of engagement includes:

Answer 2

Clear statement of the respective responsibilities of directors and auditors
The area of the audit, a brief description
Fees charged

Question 3

Letter of engagement UK includes

Answer 3

Arrangements for planning, confirmations from planning, confirmations from management
Any illegal activities where auditors will need to report the wrongdoings - money laundering
Auditors duties woth regards to governance

Question 4

The main stages of the audit process are

Answer 4

1.Appointment - letter of engagement
2.first steps
Initial analytical review
Evaluation of accounting systems and internal controls
3.testing and gathering evidence
4.completion and review
5. Reporting

Question 5

Analytical review

Answer 5

Used throughout report
Its used go analyse the relationships between data eg accounting periods, within one entity
Determine if data is reasonable or to flag up any unusual relationships
Ratio analysis

Question 6

Specific audit assertions

Answer 6

Completeness 
Existence 
Accuracy 
Valuation 
Ownership 
Presentation 
Occurrence

Question 7

Auditors identify and assess risks: at financial statement level

Answer 7

Risks pervasive to financial statements as a whole

Question 8

Auditors identify and assess risks: at the assertion level

Answer 8

Affect individual transactions, balances, disclosures

Question 9

The nature of audit evidence

Answer 9

Persuasive, consistent

Question 10

Sufficiency

Answer 10

The measure of the quanity of audit evidence, appropriateness is the measure of the quality/reliabilty of audit evidence and its relevance

Question 11

Assurance engagement

Answer 11

Only Limited assurance

Are not normally based on thebsame detiled work that would form the basis of a statutory financial statement audit

Question 12

2 types of risks affect the auditor

Answer 12

Business risk

Audit risk

Question 13

Business risk

Answer 13

The risk that the auditor client will fail to achieve its objectives

Question 14

Audit risk

Answer 14

The risk that auditors may give an inappropriate audit option when the financial statements are materially misstated

Question 15

3 principal components of audit risk

Answer 15

Inherent - outwith auditor control
Control - outwith auditor control
Detection
^ auditor must assess them all

Question 16

Inherent risk

Answer 16

The risk posed by an error/omission in a financial statement

Question 17

Control risk

Answer 17

When an error is made that isnt flagged up/corrected by the entitys system

Question 18

Detection risk

Answer 18

Is the risk thst the auditor will not detect a material misstatement

Question 19

Audit risk model

Question 20

Reliability of audit evidence

Answer 20

• It is increased when it is obtained from independent sources outside the entity
• When obtained directly by auditor