Week 5 Flashcards
what should an audit plan include?
- what tests should be performed
- who should do them
- how much work should be done (e.g., sample sizes)
- when the work should be done (interim or final audit)
timing of an interim audit?
- completed part way through the year
- early enough to not interfere with year end procedures
- late enough to enable sufficient work to be done to reduce pressure on the final audit
purpose of an interim audit?
allows the auditor to spread out their work and cope with a tight reporting deadline
what work is performed in an interim audit?
- document systems
- evaluate controls
- detailed testing (e.g., samples, purchases)
what are the impacts of the interim audit on the final audit?
if controls are working well, fewer substantive tests can be performed on the final audit
if controls aren’t working well, more substantive testing will be needed on the final audit
timing of a final audit?
- after the year end once they have their final numbers
- done after the client has completed their year end procedures
- before the company files their financial statements with the relevant authorities
purpose of a final audit?
to ensure the auditor has sufficient appropriate evidence to give an opinion on the financial statements in the audit report
what work is performed in the final audit?
- audit SOFP balances
- perform transaction testing for transactions that occurred after the interim audit
- audit year end journals and adjustments
- ensure controls tested at the interim stage continued to operate up until the year end
- look at going concern an subsequent events
- perform an overall review of the FSs
- communicate misstatements to management
fraud = ?
an intentional act using deception to obtain an unjust or illegal advantage
what are the two types of fraud?
- fraudulent financial reporting
- misappropriation
fraudulent financial reporting fraud = ?
intentionally misstating the financial statements to make them look better or worse than reality
misappropriation fraud = ?
the theft of a company’s assets such as cash or inventory
error = ?
an unintentional misstatement
subsequent events = ?
major events that occur after the year end
who’s responsible for preventing fraud and error in a company?
directors
- primarily responsible for prevention/detection of fraud
- implement effective internal controls
- consider implementing an internal audit department
- create ethical culture
what does the internal audit department do?
- test effectiveness of controls
- perform fraud investigations
- perform surprise testing (e.g., inventory/assets checks)
role of auditors regarding fraud and error?
to obtain reasonable and appropriate evidence to give an opinion regarding whether the FSs are free from material misstatements caused by fraud or error
what must auditors do to be professionally sceptical?
- have a questioning mind
- critically assess audit evidence
- be alert
what should auditors discuss with management regarding fraud/error?
- consider if management/employees have incentive to commit fraud
- discuss in the audit team the risk of fraud in this assignment
- ask management how they assess the risk of fraud
- ask management if they’re aware of control weaknesses
- ask management if they’re aware of fraud
what constitutes auditors’ response to the risk of fraud?
- obtain written representations from management that they’ve informed us of known/suspected fraud
- test year end journals/adjustments
- make audit procedures unpredictable
- test accounting estimates and areas requiring judgement
can fraud be likely even if auditors do a good job?
yes
who is fraud reported to?
- management
- those charged with the company’s governance
- 3rd parties if there’s a duty to report
- shareholders if material by giving modified audit opinion
what are auditors’ responsibilities regarding laws & regulations?
must consider laws & regulations when auditing the FSs in ‘ISA 250 Consideration of laws and regulations’
what does non-compliance with laws and regulations lead to?
misstatement in FSs
e.g., contingent liabilities are missed, going concern is affected
what are the types of non-compliance?
can intentional and unintentional
non compliance against accounting standards
non compliance against laws and regulations
what are the directors’ responsibilities regarding laws & regulations?
to ensure the company complies
keep up to date with changes in legislation
develop adequate controls
what are the auditors’ responsibility regarding laws & regulations?
obtain evidence that regulations have been adhered to
respond appropriately if non-compliance is discovered
audit procedures for laws & regulations?
obtain a general understanding of laws & regulations that affect the client
who must auditors report non-compliance to?
speak to management
speak to 3rd parties
speak to those charged with the company’s governance
speak to shareholders
what is the purpose of the ethical standard for laws and regulations?
- provides guidance to accountants for actions they must take if they become aware of illegal acts by client or employer
- addresses the duty of confidentiality
- auditors need to speak to management and encourage self reporting
what are the aims of new regulations?
- encourage response by management
- stop adverse consequences for investors, creditors employees & public
- public authorities and regulators can take action
what does quality control under ISA220/ISQC 1 for the audit firm encompass?
- leadership
- ethical requirements
- acceptance/continuance
- human resources
- engagement performance
- monitoring of quality control
elements of quality control for leadership?
audit partner takes overall responsibility for the quality of the audit and ensures
- compliance with ethical requirements
- appropriate acceptance/continuance
- competent engagement team
- appropriate reviews have been done
- sufficient appropriate evidence has been obtained
- appropriate consultation on contentious matters
partner’s responsibility regarding engagement performance - direction?
ensure team members know their responsibilities, the nature of the business and risks
partner’s responsibility regarding engagement performance - supervision?
- track the progress of the audit
- monitor the competence of the team
- address significant matters during the audit
- arrange consultation where required
partner’s responsibility regarding engagement performance - review?
- work has been performed in accordance with auditing standards
- work performed is consistent with the conclusions made
- evidence is sufficient & appropriate
- critical areas of judgement are reviewed
when are ECQR’s necessary?
only for PLCs and other high risk clients must be subject to a ECQR
also known as a ‘hot review’
EQCR = ?
engagement quality control review
an independent partner review
what should the reviewer for an ECQR be like?
- should have appropriate technical qualifications, experience and authority
- must be objective - not been involved in the audit
what does an EQCR include?
- discussion of significant matters with the engagement partner
- review of the financial statements and audit report
what is an ECQR simply put?
a fresh pair of eyes to assess/review an audit engagement
purpose of a cold review?
to assess whether the firm’s policies and procedures are working appropriately
performed by the firm’s quality control department or an external consultant
what actions should be taken if deficiencies are found during a cold review?
- additional staff training
- increase the frequency of quality control reviews
- change the firm’s quality control policies
- take disciplinary action
what is a cold review?
a cold file review features a detailed review of the accounts and audit file(s) of assignments that have been fully completed and signed off
done after the audit is finished
can be carried out by a partner or external consultant
