week four

Question 1

how is continent fees a threat to independence?

Answer 1

audit companies can not charge fees based on a clients profits

Question 2

how is compensation/evaluation a threat to independence?

Answer 2

an auditor can not be evaluated and compensated on the quality of selling their non-audit work.

Question 3

what is litigation and how is a threat to independence?

Answer 3

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

Question 4

how is familiarity a threat to independence?

Answer 4

familiarity would lead an auditor to become more sympathetic and therefore no longer apply professional scepticism.

Question 5

what is the safeguard for the threat of long association?

Answer 5

-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

Question 6

what is the safeguard for the threat of family relationships?

Answer 6

remove the individual from the audit team

Question 7

what is the safeguard for the threat of employment with a client ?

Answer 7

if it is a PLC, there must be a set of financial statements that the partner was not part of.

Question 8

how is advocacy a threat to independence?

Answer 8

-representing a client
-promoting a client
-negotiating on behalf of a client

Question 9

how is self-review a threat to independence?

Answer 9

auditors may be unlikely to admit to errors in their own work or may not identify errors.

Question 10

how is the threat of accounting and bookeeping safeguarded?

Answer 10

-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.

Question 11

how is the threat of internal controls safeguarded?

Answer 11

if it is a PLC not allowed where the services affect the financial statement.

Question 12

how can tax services/advice be safeguarded?

Answer 12

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

Question 13

how is valuation service safeguarded?

Answer 13

not allowed if it is material to the financial statement.

Question 14

how is the employment of temporary staff safeguarded?

Answer 14

-no management responsibility
-client supervises their work
-loaned member is not part of the audit team

Question 15

how is corporate finance services safeguarded?

Answer 15

use professionals who are not part of the audit team

Question 16

under what circumstances can an auditor go against confidentiality?

Answer 16

-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.

Question 17

when does a conflict of interest arise?

Answer 17

when the same audit firm audits two companies that operate in the same market or trade with each other

Question 18

how can conflict of interest be tackled?

Answer 18

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

Question 19

what are the conditions to accept new clients for an audit?

Answer 19

-professional competence
-fees
-reputation of a client
-professional clearance
-preconditions of an audit

Question 20

what is meant by professional competence?

Answer 20

-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.

Question 21

what is meant by preconditions of an audit?

Answer 21

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

Question 22

what is the purpose of an engagement?

Answer 22

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

Question 23

what happens during changes to the engagement letter?

Answer 23

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

Question 24

under what circumstances does an auditor have to issue a new engagement letter?

Answer 24

-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

Question 25

how is an audit started?

Answer 25

it is started with a risk assessment,

-understanding the entity
-performing analytical review

Question 26

what is meant by an audit risk?

Answer 26

the risk an auditor expresses an inappropriate audit opinion and includes both the risk of material misstatement and detection risk

Question 27

what is meant by the risk of material misstatement?

Answer 27

risk that the financial statement must be materially misstated before the audit

Question 28

what is meant by inherent risk?

Answer 28

the susceptibility of a material misstatement in the financial statement assuming that there were no internal controls

Question 29

control risk?

Answer 29

the risk that material misstatement is not prevented by internal controls

Question 30

sampling risks?

Answer 30

the conclusion drawn from a sample might be different from the conclusion drawn if the whole population was taken into consideration

Question 31

non sampling risks?

Answer 31

the risk of drawing out conclusions for other reasons

Question 32

what is materiality?

Answer 32

misstatements in the financial statements that could potentially alter the economic decisions of users

Question 33

how is it measured according to isa 320?

Answer 33

• (0.5-1%) of revenue
• (5-10%) of profits before tax
  -(1-2%) of total assets

Question 34

what are the risk assessment procedures?

Answer 34

-enquire with the management and internal audit team
-analytical procedures
-observation fo controls
-inspection of strategic documents

Question 35

what are some of the responses to risk assessments?

Answer 35

-ensuring we practice professional scepticism
-using more experienced staff
-placing less reliance on control testings