External audit- Primer 1

Question 1

what should an auditor consider when deciding whether or not to accept a new audit engagement?

Answer 1

• Ethical and independence issues
• Doubts about integrity of client
• Legal issues
• Strategic decision/ commercial issues

Question 2

client evaluation

Answer 2

• evaluating the integrity management
• making inquiries of third parties
• reviewing previous experience with existing clients
• identifying special circumstances and unusual risks

Question 3

planning objectives

Answer 3

• appropriate attention devoted to important areas including areas of potential fraud
• proper assignment of work to team
• work completed efficiently and effectively

Question 4

understanding the entity and its environment

Answer 4

• objective relating to business risk
• nature of entity
• internal control
• selection of accounting policies
• financial performance
• external factors like the industry

Question 5

when auditors carry out an audit they must:

Answer 5

• maintain an attitude of professional scepticism
• exercise professionale judgement

Question 6

audit risk

Answer 6

the risk that the auditor expresses the wrong audit opinion

Question 7

inherent risk

Answer 7

• risk of material misstatement due to the nature of the client

Question 8

detection risk

Answer 8

risk of material misstatement due to factors under the auditors control

Question 9

The audit risk model

Answer 9

AR = IR x CR x DR

Question 10

Actions to manage risk

Answer 10

• more resources
• better expertise
• more time
• more audit testing
• closer supervision
• closer focus on high risk areas

Question 11

materiality

Answer 11

• misstatements are considered to be material if they could reasonably influence the economic decisions of users taken on the basis of the financial statements
• can be qualitative or quantitive