Week 8/9/10 - Audit And Corporate Governance (3)

Question 1

Within auditing, what are ‘analytical procedures’? And give 3 examples.

Answer 1

Analytical procedures are tools used to decide whether the balances in the accounts appear to be reasonable.

• ratio analysis
• trend
• debtor days

Question 2

Analytical procedures can be used in the 3 different stages of audit, what are the three stages and how are they used within them?

Answer 2

Planning stage

• to understand the clients financial information.
• to identify areas of significance.

Substantive testing
- to test the reasonableness of classes of transactions or account balances.

At the review stage
- as part of the final audit completion

Question 3

Once analytical procedures have been completed, what is to be considered?

Answer 3

• are there significant differences between the expected and actual.

Question 4

At the completion stage of an audit, what is the process for completion?

Answer 4

1. Subsequent events review
2. Obtain written representation from management 9confirming uncertainties)
3. Review evidence as a whole
4. Form opinion and agree audit report

Question 5

on conception of an audit, the auditor may advise a client to adjust their accounts however…

Answer 5

They don’t have to if they don’t wish to

Question 6

What is meant by the term ‘subsequent event review’?

Answer 6

the process of assessing the events between the reporting date (year end) and the date of the audit is signed off is called ‘subsequent events’ and they need to be reviewed.

Question 7

Give some examples of post-end of year events that may require adjustment in the accounts.

Answer 7

• resolution of litigation

- events concerning trade receivables (insolvency, paying up)

Question 8

What is meant by the term ‘non-adjusting events’?

Answer 8

Events that occurred but did not impact upon the reporting period. They need to be disclosed in the notes to the financial statements.

Examples:

• uninsured fire, floods, natural disaster.
• Significant transactions (takeover, disposal).

Question 9

IAS 560 requires evidence related to these subsequent events:

Answer 9

1. New loan commitments
2. issue of new shares
3. Destruction of assets
4. major events affecting the business
5. evidence relating to accounting estimates

Question 10

The final audit report consists of 6 main areas, what are they?

Answer 10

1. Do the statements reflect a true and fair view?
2. Proper returns have been received from branches not visited by the auditor.
3. The financial statements are in agreement with the accounting records.
4. The auditor has received the info and explanations they require.
5. The info given in the directors report is consistent with the accounting records.

Question 11

The ‘Audit opinion’ is one section of the…

Answer 11

Audit report

Question 12

An Audit opinion can either be…

Answer 12

Modified

Or

Unmodified

Question 13

What is meant by the term ‘modified opinion’?

Answer 13

A modified opinion occurs where the auditor is not satisfied with the evidence or with the content of the financial statements.

Question 14

Modified opinion can also be known as…

Answer 14

Qualified opinions

Question 15

What are the two main reasons for a modified opinion to occur?

Answer 15

• Disagreement between the auditor and the client.

- Limitation of scope (due to a lack of evidence).

Question 16

In relation to the ‘going-concern’ concept, the auditors responsibility according to IAS 570 is…

Answer 16

“The auditors responsibility is to obtain sufficient evidence about the appropriateness of managements use of the going concern assumption… and to conclude whether there is a material uncertainty about the entity’s ability to continue as a going concern”

Question 17

What does the ‘Going-concern’ have an affect on within an audit?

Answer 17

Inventory - inventory is likely to be valued lower because it will not be transformed into finalised products.

Question 18

What are the indicators of going-concern worries?

Answer 18

• Loss making
• Loss os funding support
• Loss of key customer
• Net liability position - owe more than I own
• Loss of key staff
• negative operating cash flow
• Changes in laws and litigation (PPI company example)

Question 19

What can auditors do to establish whether a business is a going-concern or not?

Answer 19

• Review cash flow forecasts (what is the cash flow for the next 6 months?)
• Sensitivity analysis (What happens if sales go up or down 10%?)
• Review post year-end sales and order book (is there evidence the business is selling more or less?)
• Review loan agreements (is a breach likely?)