week four Flashcards
how is continent fees a threat to independence?
audit companies can not charge fees based on a clients profits
how is compensation/evaluation a threat to independence?
an auditor can not be evaluated and compensated on the quality of selling their non-audit work.
what is litigation and how is a threat to independence?
litigation is the process of taking legal action and if this ever comes about during an audit, auditors are required to:
-discuss with an audit committee
-obtain an external review
-withdraw from the assignment
how is familiarity a threat to independence?
familiarity would lead an auditor to become more sympathetic and therefore no longer apply professional scepticism.
what is the safeguard for the threat of long association?
-if not a PLC then rotate partners
-if it is a PLC, then audit must be put up for tender every 10 years and audit partner must be rotated every 7 years
what is the safeguard for the threat of family relationships?
remove the individual from the audit team
what is the safeguard for the threat of employment with a client ?
if it is a PLC, there must be a set of financial statements that the partner was not part of.
how is advocacy a threat to independence?
-representing a client
-promoting a client
-negotiating on behalf of a client
how is self-review a threat to independence?
auditors may be unlikely to admit to errors in their own work or may not identify errors.
how is the threat of accounting and bookeeping safeguarded?
-if it is a PLC, then not allowed
-if not a PLC, then it is allowed but only if separate teams are used and no management decisions are made.
how is the threat of internal controls safeguarded?
if it is a PLC not allowed where the services affect the financial statement.
how can tax services/advice be safeguarded?
if it is a PLC, then it is not allowed
if not a PLC, then it is allowed by someone not part of the audit team
advice is allowed depending on a particular accounting treatment
how is valuation service safeguarded?
not allowed if it is material to the financial statement.
how is the employment of temporary staff safeguarded?
-no management responsibility
-client supervises their work
-loaned member is not part of the audit team
how is corporate finance services safeguarded?
use professionals who are not part of the audit team
under what circumstances can an auditor go against confidentiality?
-when it is permitted by the law and the client
-when it is permitted by the law to disclose issues such as money laundering
-there is a professional duty for auditors to disclose such as quality reviewing and responding to a regulatory board.
when does a conflict of interest arise?
when the same audit firm audits two companies that operate in the same market or trade with each other
how can conflict of interest be tackled?
all parties must be notified that there is a conflict of interest and the following procedures should be taken:
-seperate engagement teams
-procedures to prevent the leak of information
-engagement teams sign a confidentiality agreement
-an independent partner regularly reviews safeguards
what are the conditions to accept new clients for an audit?
-professional competence
-fees
-reputation of a client
-professional clearance
-preconditions of an audit
what is meant by professional competence?
-the new auditor has to ask permission to the client to speak to the outgoing auditor
-it is also the responsibility for the outgoing auditor
-if the client refuses, the outgoing auditor should notify the new auditor
-if there is no contact form the outgoing auditor, the new auditor should find ways to find contact
-all relevant information about the client should be taken into consideration when making a decision to accept.
what is meant by preconditions of an audit?
it is the job for auditors to make sure all ISA 210 preconditions of an audit are met, these include:
-checking if the financial reporting framework to be applied to accounts is appropriate
- management understand their roles and responsibility
what is the purpose of an engagement?
the details not he nature of the contract must be signed before an audit starts, some qualities of this letter include:
-minimised risk of understandings
-confirms acceptance of an audit
-sets out terms and conditions for the audit to take place
what happens during changes to the engagement letter?
the engagement letter should be reviewed yearly and a new one should be assigned if the following changes occur:
-change in statutory duties due to new legislation
-change in professional duties due to new auditing regulations
-changes made by a client
under what circumstances does an auditor have to issue a new engagement letter?
-when there is a change in senior management
-when the clients change ownership
-when the client does not understand the the terms of the engagement letter
how is an audit started?
it is started with a risk assessment,
-understanding the entity
-performing analytical review
what is meant by an audit risk?
the risk an auditor expresses an inappropriate audit opinion and includes both the risk of material misstatement and detection risk
what is meant by the risk of material misstatement?
risk that the financial statement must be materially misstated before the audit
what is meant by inherent risk?
the susceptibility of a material misstatement in the financial statement assuming that there were no internal controls
control risk?
the risk that material misstatement is not prevented by internal controls
sampling risks?
the conclusion drawn from a sample might be different from the conclusion drawn if the whole population was taken into consideration
non sampling risks?
the risk of drawing out conclusions for other reasons
what is materiality?
misstatements in the financial statements that could potentially alter the economic decisions of users
how is it measured according to isa 320?
- (0.5-1%) of revenue
- (5-10%) of profits before tax
-(1-2%) of total assets
what are the risk assessment procedures?
-enquire with the management and internal audit team
-analytical procedures
-observation fo controls
-inspection of strategic documents
what are some of the responses to risk assessments?
-ensuring we practice professional scepticism
-using more experienced staff
-placing less reliance on control testings
