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Auditing > What you Should Know > Flashcards

What you Should Know Flashcards

1
Q

Why is an audit needed?

A

Info Hypothesis
Agency Theory
Insurance Hypothesis

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2
Q

Why is the audit needed?

Information Hypothesis

A

The auditor makes the information more reliable & therefore useful.

So auditors can make sense of what is going on.

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3
Q

Why is audit needed?

Agency Theory

A

Owners & providers of resources cannot trust management to act in their best interests.
Therefore they need an independent & expert agent (the auditor) to act on their behalf and monitor management and verify their reports.

Agency Theory - Auditors are the agents of the shareholders’

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4
Q

Why is audit needed?

Insurance Hypothesis

A

Users of audited accounts may be able to sue the auditor if they incur a loss.
(negligence & duty of care must be proven)

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5
Q

Audit Risk

A

The risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated.

Audit risk is a function of the risk of materially misstatement and detection risk.

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6
Q

Audit Risk Formula

A

Audit Risk = Inherent Risk x Control Risk x Detection Risk

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7
Q

What are the ethical principles?

A 
Ethical Principles
- Integrity - honest 
- Objectivity - not bias
- Independence - free from conditions and relationships which where your independence could be compromised.
Independence of Mind and Appearance
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8
Q

6 threats to ethical principles?

A

6 threats
- Self-interest threat - you allow your own interests influence your professional judgement

  • Self-review threat - Accountants may not appropriately evaluate the results of a previous judgment made or service performed.
  • Management Threats
    Accountant will not be objective or independent because they have made judgement or taken decisions that are the responsibility of management
  • Advocacy Threat
    Accountant could promote a client’s or employer’s position to the point that their objectivity is compromised
  • Familiarity Threat
    Due to a long or close relationship with client or employer - you become sympathetic and too accepting
  • Intimidation threat
    Management can be intimidating compromising your objectivity
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9
Q

Safeguards to Ethical Principles

A

Safeguards

  • Education, training and experience requirements for entry
  • Professional developments
  • Corporate Governance Regulations
  • Professional Standards
  • External Review
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10
Q

What happens at each key stage from Engagement to reporting

A

Engagement - if you want to accept the client
Planning - Understanding the business - Audit strategy & plans
Interim audit including review of internal controls
Final Audit - When you are able to do your business sheet work
Reporting

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11
Q

Inherent Risk

A

The susceptibility of an assertion about a class of transactions, account balance, or disclosure to a misstatement that could be material, either individually or aggregated with other misstatements, before consideration of any related controls.

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12
Q

Control Risk

Lack of proper accounting controls

A

The risk a misstatements could occur in an assertion about a class of transactions, account balance, or disclosure that could be material, either individually or aggregated with other misstatements, will not be prevented, detected and corrected, in a timely basis by the entity’s internal control.

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13
Q

Detection Risk

A

Failure to detect risk

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14
Q

Business Process

A

Is a set of activities that helps a company achieve one more more of its objectives.

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15
Q

Business Risk

A

Is the chance that an event/action/inaction will stop or hinder a company from achieving one or more of its objectives.

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16
Q

Internal Controls

A

Are systems & procedures put in place by management to minimise risk and to ensure business processes work as intended.

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17
Q

What are the 5 Components of Internal Controls

A
  1. The control environment
  2. Risk Management
  3. Info Systems
  4. Control activities
  5. Monitoring & Responding
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18
Q

Internal Audit

A

An appraisal or monitoring activity established by management and the directors for the review of accounting and internal control systems as a service to the entity

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19
Q

Control Activities

5 of them

A
  1. Authorisation Controls
  2. Physical Controls
  3. Info Processing Controls
  4. Performance Reviews
  5. Segregation of Duties
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20
Q

Limitations to controls

5 of them

A
  • Human Error
  • Management override
  • Collusion
  • Unusal/infrequent transactions
  • Obsolescence
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21
Q

What 5 Key Business Processes?

A
  • Sales
  • Purchasing
  • Stock
  • Payroll
  • Fixed Assets
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22
Q

Sales Cycle - 6 phases

A
  • Customer places order
  • Ordered fulfilled and dispatched
  • Customer invoiced for gods
  • Customers pay for goods
  • Goods Returned
  • Credit note issued/refund given
23
Q

Purchase Cycle - 6 phases

A
  • Raise purchase order
  • Receive goods
  • Process purchase invoice
  • Pay for goods
  • Goods returned
  • Credit note received/credit cancelled
24
Q

Payroll Cycle - 4 Phases

A
  • Engagement/termination
  • Work measurement/time recored
  • Calculation of payroll liability
  • Payment
25
Q

Stock Cycle - 5 phases

A
  • Receipt stock
  • Movement and manufacturing sock
  • Holding Stock
  • Issuance of Stock
  • Valuation of Stock
26
Q

Fixed Assets 4 phase

A
  • All fixed assets identified
  • All fixed assets accurately valued
  • All disposals identified and valued
  • Stewardship
27
Q

Compliance Testing

Testing Internal Controls

A

To see whether the internal control systems are working properly

28
Q 
Compliance Tests
Tests of Controls 
- What do effective controls ensure?
- Auditors can rely on controls to reduce what?
- When must controls work?
A
  • Effective controls help ensure that accounting data are complete, valid and accurate
  • Auditors can rely on controls to reduce audit risk and there tests of details
  • Controls must work throughout the accounting period
  • You are testing something clients should have done§
29
Q

Compliance Tests

What do the tests involve

A
  • Enquiry
  • Observe of activities
  • Inspecting source documents
  • Re-performance
30
Q

Substantive Testing
Test transaction and accounting balance

What does it evaluate?

A

To evaluate the completeness, accuracy and occurrence of data produced by the accounting system

31
Q

Substantive Testing
what are the two types

The IAS leaves it up to the auditors. If they want to do both types or only one to reduce risk.

A

a. Specific Analytical Procedures

b. Testing of Details (test of transaction - income statement, test of balances - SOFP)

32
Q

Why are substantive test (almost) always performed?

A

Auditors assessment is a judgement, it may not be sufficiently precise to identify all risk of material misstatement.

33
Q

Testing of Details (F/S assertions)
Testing of Transactions and events

Orals
Cunt
Ate
Camerons
Cock 
Practically
A

Occurence
Completeness
Accurary
Cut-off - Accounted for in the correct accounting period
Classification - exist and have been recorded in the proper accounts
Presentation

34
Q

Testing of Details (F/S assertions)
Testing of Balances
Assets, liabilities and equity interest

Eddie's 
Cunt
Ate
Camerons
Penis
Right
A 
Existence
Completeness
Accuracy 
Classification
Presentation
Rights and obligations - entity holds or controls the rights to assets.
35
Q

Methods of Obtaining Evidence

A

Observation - observe stock take

Re-performance - execute procedures for testing internal controls

Inspection - inspect invoices and compare with a purchase order

Inquiry - ask directors questions

External confirmation - obtain written documents from 3rd party

Re-calculation

Analytical procedures - compare last years results to the current period

36
Q

What is sampling?

A

The application of audit procedure to less than 100% of items within an account balance or class of transactions to enable auditors to obtain & evaluate audit evidence about some characteristics of the item selected.

Auditors seek to provide a reasonable, not absolute opinion that the F/S’s are free from material misstatement.

37
Q

What is sampling used for?

A

For tests of controls and/or substantive tests of transactions through a set of well-defined steps.

Auditors are interested in the occurrence of the following types of expectations in populations of accounting data:

a) deviations from the client’s established controls (compliance testing)
b) Monetary misstatements (substantive testing)

38
Q

Audit Evidence

A

ISA 500 requires the auditor to obtain ‘sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion.’

39
Q

What are the categories of audit evidence?

A
  • Underlying accounting data
    • Books of original entry
    • Accounting manuals
  • Corroborating Information
    • Documents such as cheques, invoices
40
Q

Appropriateness of audit evidence

What does appropriateness measure?

A

the quality or reliability of audit evidence and its relevance to a particular assertion.

41
Q

What is auditor’s judgement on appropriateness of audit evidence influenced by?

A

Auditor’s judgement on the appropriateness of audit evidence is influenced by

  • Risk
  • Relevance
  • Reliability
42
Q

Sampling ISA 530
When designing an audit sample, the auditor shall consider the ______ of the _____ _________ and the ___________ of the _________.

The auditor shall determing the sample size __________ to ______ ________ ____ to an acceptably ___ ____.

The auditor shall select items for the sample in such a way that each ________ ___ in the __________ has a ______ of _________.

A

When designing an audit sample, the auditor shall consider the PURPOSE of the AUDIT PROCEDURE and the CHARACTERISTICS of the POPULATION.

The auditor shall determine the sample size SUFFICIENT to REDUCE SAMPLING RISK to an acceptably LOW RISK.

The auditor shall select items for the sample in such a way that each SAMPLING UNIT in the POPULATION has a CHANCE of SELECTION.

43
Q

Sampling Risk

A

Audit draws the wrong conclusion about a population based on the sample.

44
Q

Non-sampling risk

A

Human Error

  • Wrong audit procedures
  • Misinterpretation of results
  • Reliance on wrong info
45
Q

Tolerable Error

A

The maximum rate of deviation or misstatement in the population that the auditor will accept

46
Q

Expected error

A

The expected rate of deviation or misstatement in the population that the auditor expected to find.

47
Q

Stratified Sample
- The population is divided into what?
- A sample is selected for each ___.
Can be more efficient

A
  • Sub-popultions
  • A sample is selected for each one
  • Can be more efficient
48
Q

Sampling

What must you record and do if there is errors.

A
  • Record any errors
  • Extrapolate from the sample to the population using probability theory
  • If tolerable error rate is breached - investigate!
49
Q

3 examples of non-statistical sampling methods

A
  • Judgemental sampling
  • Haphazard Selection
  • Black/cluster selection
50
Q 
What are the 7 points that happen at Audit Completion?
Reece
Ate
Orals
Sick
Must 
Report
Arthur
A
  • Re-calculate misstatement and asses misstatement
  • Assess going concern
  • Overall analytical review of financial statements
  • Subsequent Events
    Management Re-representaion letters
  • Reports to management
  • Audit report
51
Q

Contingent Liability

  • Slight change - no disclosure
  • reasonably possible - disclosure in notes
  • Probable to occur - Estimate if it can be
    if not disclosure in notes`
A

A potential failure obligation to an outside part for an unknown amount resulting from actives that have already taken place

52
Q

Commitment

A

A contractual undertaking

53
Q

What is a Subsequent event?

A

An favourable or unfavourable event which occurs after the periodic end (or become known) and before the then of the F/S’s are issued.

Auditing (9 decks)

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