Week 9 Part 2

Question 1

what is an internal audit?

Answer 1

an independent, objective assurance activity to evaluate a company’s controls to ensure they’re working effectively

Question 2

how are internal audits independent?

Answer 2

because internal auditors have no operational input

they ONLY perform checks

Question 3

are internal audit teams compulsory?

Answer 3

no

however, they’re expected in larger entities

Question 4

what are the objectives of internal/external auditors?

Answer 4

internal auditors objective is to help management improve operations

external auditors’ objective is to provide an opinion on the truth/fairness of the FSs

Question 5

who do internal/external auditors report to?

Answer 5

external auditors report to the shareholders and it’s publicly available

internal auditors report to management & those charged with corporate governance

Question 6

who appoints the internal/external auditors?

Answer 6

shareholders appoint external auditors (independent)

management appoint internal auditors (can be employees or outsourced)

Question 7

what is the scope of the work for internal/external auditors?

Answer 7

external auditors only verify truth/fairness of FSs

internal auditors’ work is wide in scope and do whatever management need

Question 8

what does the role of an internal auditor consist of?

Answer 8

• risk identification
• help with corporate governance (decision making)
• advise on effectiveness of controls
• prevention/detection of fraud
• value for money (checking money’s spent in the right places)
• check compliance with laws & regulations
• no limitation on scope of work

Question 9

limitations of internal audit?

Answer 9

internal auditors are often employees, and may censor their opinions to avoid upsetting management

risk of familiarity

Question 10

can internal audit duties be outsourced?

Answer 10

yes

Question 11

advantages of outsourcing internal audit responsibilities to 3rd parties?

Answer 11

• complete independence
• broader range of expertise
• legally responsible for their actions
• more focus on cost efficiency
• better market software/resources
• can employ on flexible basis

Question 12

disadvantages of outsourcing internal audit responsibilities to 3rd parties?

Answer 12

• lack intimate knowledge of the system
• potentially high fees
• conflict of interest if internal auditor is also external auditor
• loss of flexible availability as they’re not employees
• lack of control over work quality
• pressure on independence

Question 13

what various sections of the accounting system require audit testing?

Answer 13

• receivables
• payables & provisions
• inventory
• bank & cash
• share capital & reserves
• NCAs
• estimates

Question 14

what must an audit procedure contain?

Answer 14

an ACTION
applied to a SOURCE
to achieve an OBJECTIVE

Question 15

must every audit test meet at least one FS assertion?

Answer 15

yes

Question 16

6 P&L FS Assertions

Answer 16

• occurrence
• completeness
• cut off
• presentation
• accuracy
• classification

Question 17

6 SOFP FS Assertions

Answer 17

• completeness
• presentation
• classification
• rights & obligations
• accuracy & valuation
• existence

Question 18

what do auditors test for overstatement?

Answer 18

assets and income

Question 19

what do auditors test for understatement?

Answer 19

liabilities and expenses

Question 20

directional testing?

Answer 20

knowing whether you’re performing audit tests to check for over/understatement

Question 21

what FS assertion does testing for understatement involve?

Answer 21

completeness

if FSs show the complete, full picture, not missing anything

Question 22

what FS assertions do testing for overstatement involve?

Answer 22

existence, valuation & accuracy, occurrence, rights & obligations

Question 23

understatement =
overstatement =

Answer 23

understatement = occurs if a transaction occurs but isn’t recorded

overstatement = occurs if a transaction is recorded, but didn’t occur

Question 24

how does an auditor test for overstatement and understatement?

Answer 24

overstatement - select sample from FS and trace to source documents

understatement - select sample from source documents and trace to FS

Question 25

what is the purpose of auditing bank & cash?

Answer 25

to check how much cash the company has at the bank

testing to verify existence and valuation

Question 26

what are the sources of evidence when auditing bank & cash?

Answer 26

• bank confirmation letter
• bank statement
• cash book
• bank reconciliation

Question 27

what does a bank reconciliation consist of?

Answer 27

it matches figures in cash book/FS to figure in bank statement

• date
• balance per cash book/FS
• ADD unpresented cheques
• LESS outstanding lodgements
• difference
• balance per bank statement

Question 28

unpresented cheques and outstanding lodgements?

Answer 28

cash paid out or cash received in cash book that hasn’t yet been processed due to time required for procession

Question 29

5 Steps of the audit procedures for bank & cash?

Answer 29

1) obtain bank reconciliation
2) ensure bank reconciliation adds up
3) match ‘cash book’ balance to cash book
4) match ‘bank statement’ to bank statement
5) prove unpresented cheques & outstanding lodgements were due to genuine time differences by showing post/pre-year end bank statement

Question 30

why should an auditor review cash book and bank statement for unusually large transactions around the year end?

Answer 30

sign of window dressing

window dressing = manipulation of FSs

Question 31

what does auditing non-current liabilities (NCL) consist of?

Answer 31

usually only long term bank loans

Question 32

what FS assertion does auditing NCLs relate to?

Answer 32

verifies completeness

testing for understatement

Question 33

what are the sources of evidence when auditing NCL?

Answer 33

• bank confirmation letter
• loan statement
• bank agreement
• cash book

Question 34

8 Steps of audit procedures for NCLs?

Answer 34

1) obtain summary of outstanding loans & match it to FSs

2) agree outstanding loans to bank confirmation letter

3) reassess split between NCL and CL

4) inspect bank confirmation letter for loans not included in FSs

5) inspect bank confirmation letter for details over security

6) inspect cash book for loan repayments made

7) inspect loan agreement for restrictive covenants

8) recalculate interest charge and interest accrual

Question 35

restrictive covenant?
security?

Answer 35

restrictive covenant = rules as part of the loan which restricts the activities of the borrower

security = if a loan isn’t repaid/defaulted, lender has the right to own an asset belonging to the borrower

Question 36

paid in arrears?
paid in advance?

Answer 36

in arrears = paid afterwards
in advance = paid beforehand