Week 8/9/10 - Audit and Corporate Governance (1)

Question 1

What is the generic definition of an ‘external audit’?

Answer 1

‘The independent examination of, and expression of opinion on, the financial statements of an organisation including the whole system of internal and management controls relied upon to produce those financial statements’

Question 2

In practise, the audit gives an opinion on what two main things?

Answer 2

1. The fairness of the financial statements.

2. The ability of the company to continue as a ‘going concern’.

Question 3

What is meant by the term ‘Materiality threshold’?

Answer 3

The figure is a numerical value that a firm accepts will cover the errors within the financial statements.

The materiality threshold is almost like a ‘margin of error’.

Question 4

What are the responsibilities for directors in an audit?

Answer 4

1. Ensuring the financial statements give a true and fair view.
2. Putting in place internal controls to ensure no.1.
3. Deciding if the business is a going concern.

Question 5

What are the responsibilities of the auditor in an audit ?

Answer 5

1. Obtain reasonable assurance that the F/S are free from material error.
2. Ensure the accounts are fair within the materiality threshold.

Question 6

What is important to remember when thinking about the responsibilities of auditors in the audit process?

Answer 6

The auditor cannot be held accountable for everything because they do not test 100% of transactions and they’re not directly searching for fraud.

Question 7

What are the 3 main elements of an audit that are considered?

Answer 7

1. Independence
2. Expression of opinion
3. reliance on internal and external controls

Question 8

In relation to auditor independence, ACCA identifies two elements, what are they?

Answer 8

1. Independence of mind - the auditor must be objective and unbiased
2. independence of appearance - The auditor must appear to be unbiased

Question 9

What governing body has a ‘framework approach’ to auditor independence?

Answer 9

The ICAEW

Question 10

Within he ICAEW ‘framework approach’ to auditor independence, what are the 6 key characteristics?

Answer 10

1. The relevant fundamental principles are integrity and objectivity.
2. The auditor must consider if they can take the work and remain independent.
3. The treats to independence are self-interest, self-review, over familiarity or intimidation.
4. Actual threats to independence need to be considered
5. Where treats exist, safeguard must be put into place to eliminate or reduce them.
6. Ethical guidance is illustrative and not comprehensive.

Question 11

What are the 4 main reasons given by the ICAEW for a ‘framework approach’?

Answer 11

1. A framework can prevent ‘a search for ways around the rules.
2. The approach recognises the auditor is not wholly independent of their client.
3. The principles of auditor independence may need to be applied over an infinite amount of situations.
4. The business environment is continuously evolving.

Question 12

What are the 5 steps of the audit process?

Answer 12

1. Acceptance/Continuation.
2. Planning.
3. Fieldwork.
4. Completion.
5. Audit report

Question 13

When accepting a new audit, the new firm must follow what process when accessing the old auditors information?

Answer 13

1. Write to the outgoing auditor.
2. the outgoing auditor must obtain permission from the client to respond and send their response.
3. The new auditor considers the response and decides whether to take on the work or not.

Question 14

When choosing whether to accept an audit, there is an element of ‘client screening’, what does this include considering?

Answer 14

• Conflict of interests, Do we audit their competitors?
• Level of audit risk
• Sufficient remuneration? Is it worth it?
• Do we have the specialist knowledge?
• Do we understand the practical implications of accepting this audit? E.g. multiple site visits.

Question 15

The process of considering/accepting an audit shouldn’t just be done by new auditors, it should also be done by…

Answer 15

Existing auditors

Question 16

In regards to the collection of ‘sufficient’ audit evidence, the International Standard on Auditing 500 states:

Answer 16

Auditors must ‘obtain sufficient, appropriate audit evidence to be able to draw reasonable conclusions on which to base their opinion’

Question 17

The audit risk model includes 3 kinds of risk, what are they?

Answer 17

Inherent risk

Control risk

Detection risk

Question 18

What is the audit risk model? And what is it used for?

Answer 18

The audit risk model is the probability that I get my audit opinion wrong.

The audit risk model is used to assess how much testing to do and which elements of the audit need to be focussed on.

Question 19

In the audit risk model, Inherent risk can be described as…

Answer 19

The risk of misstatement.

For every transaction or balance in the accounts, there is an inherent risk that it will be wrong. There will always be a chance that this sort of risk is present.

Question 20

In the audit risk model, control risk can be described as…

Answer 20

The risk that misstatement (inherent risk) is not prevented by internal controls.

Control risk is the probability that the internal controls don’t work.

Question 21

In the audit risk model, detection risk can be described as…

Answer 21

The risk of the auditor failing to detect material misstatement.

What is the probability that the auditor will not stop the misstatement.

Question 22

After looking at the audit risk model, it can be seen that the burden of risk is places more towards…

Answer 22

The client who is being audited, they’re responsible for inherent and control risk.

Question 23

When the audit risk has been established, often it is given as either…

Answer 23

High
Medium
Low