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Auditing > revision > Flashcards

revision Flashcards

1
Q

what are the fundamental ethical principles?

A

integrity, objectivity, professional competence and due care, confidentiality, professional behaviour

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2
Q

what are the main ethical threats that an auditor must safeguard against?

A

self interest, self review, advocacy (promoting client), familiarity, intimidation

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3
Q

what powers are given to an auditor to carry out their work?

A

access to books and records

receive all information and explanations auditor deems necessary for audit

receive notice and attend meetings

notice and meetings to propose auditor removal

right to ask for meeting upon resignation

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4
Q

what are the overall objectives of an audit?

A

obtain reasonable assurance that the financial statements are free from material misstatement

report that the financial statements and communicate in accordance with ISA’s

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5
Q

what are the elements of the audit risk model?

A

inherent risk, control risk, detection risk

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6
Q

why do auditors send an engagement letter?

A

to establish whether the preconditions of an audit are there

to confirm there is an understanding between the auditor and management and those charged with corporate governance

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7
Q

what are the typical contents of an engagement letter?

A

confirm scope and objectives of audit

state responsibilities of the auditor

state responsibilities of management

identify the reporting framework

confirm basis of fees

state if management representatives will be required

request management confirm agreement of the letter

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8
Q

what objectives must an auditor meet to maintain appropriate quality in an audit?

A

audit must comply with professional standards and legislation

audit report issued is appropriate for the circumstances of the client

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9
Q

what are the responsibilities of the engagement partner regarding quality control of the audit?

A

ensure quality control standards are followed

ensure ethical standards are followed

maintain independence from client

ensure auditor is appointed correctly

check audit team have sufficient experience

review work carried out

appoint quality control reviewer

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10
Q

what are the qualities of good audit documentation?

A

provides sufficient appropriate record to support auditors report

provides evidence that the audit was planned in accordance with ISA’a and applicable legislation

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11
Q

why does the auditor produce audit documentation?

A

helps plan the audit

evidence that the work has been carried out

shows who produced the documentation

evidence to assist in planning of future audits

shows quality control standards have been followed

shows auditor complied with ISA’s and other relevant regulations

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12
Q

what are the auditors responsibilities regarding fraud?

A

determine if the financial statements have material misstatements caused by fraud

obtain evidence to decide whether material misstatement has occurred due to fraud

if fraud is found, report to management

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13
Q

what is the normal audit work regarding fraud?

A

maintain attitude and professional skepticism

found out how management assess fraud risk

assess risk of material misstatement due to fraud

evaluate evidence obtained

share concerns with those charged with corporate governance

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14
Q

what situations does the auditor report in a management letter?

A

controls are designed, implemented or operated in a way that will not prevent material misstatement

controls to prevent material misstatements are missing

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15
Q

what does the management letter say about each internal control deficiency?

A

explains the deficiency

descriptions on the potential effect of deficiency

suggest actions to overcome deficiency

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16
Q

what are the benefits of audit planning?

A

devote attention to appropriate areas of audit

identify and resolve problems in a timely manner

audit performed efficiently and effectively

select appropriate members of audit team

assist direction of audit

coordinates work with auditors and experts

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17
Q

what is the audit strategy?

A

overall approach to the audit:
audit scope, timing, direction

identifies risky areas for the attention of the audit

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18
Q

what us the audit risk model?

A

control risk x inherent risk x detection risk = audit risk

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19
Q

what are the four stages of assessing risk in an audit?

A

initial procedures to identify risk, i.e talk to management and analytical procedures

obtain information about the client and industry, assess inherent risk

obtain information about the clients internal control systems, assess control risk

determine where and whether a material misstatement could occur

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20
Q

in assessing internal controls systems, what are the internal control elements?

A

control environment

entity’s risk assessment procedures

information systems

control activities

monitoring of controls

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21
Q

what are the main control activities that an auditor can place reliance on?

A

performance reviews

application controls

general IT controls

physical controls

segregation of duties

authorization controls

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22
Q

why can audit procedures give an incorrect result?

A

sampling risk: sample chosen is not representative of the population

non sampling risk: the auditor applies audit procedures incorrectly

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23
Q

what are the audit assertions relating to the income statement?

A

occurrence - transaction actually occurred and belongs to the entity

completeness - all transactions are recorded

accuracy - amounts are recorded correctly

cut off - recorded in correct accounting period

classification - recorded in correct amounts

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24
Q

what are audit assertions relating to the statement of financial position

A

Existence - items actually exist

rights and obligations - entity owns the asset or has obligation to pay liability

completeness - all assets and liabilities are recorded

valuation and allocation - assets and liabilities in financial statements are at appropriate amount

25
Q

What is materiality?

A

materiality - the amount by which a figure in the financial statements must change to influence the economic decisions of users of the financial statements

performance materiality - the amount used by the auditor in planning the audit procedures - less than matreriality itself

26
Q

what are the guidelines for materiality?

A

profit before tax

gross profit

turnover

27
Q

what are the steps the auditor uses to collect evidence regarding an identified risk?

A

identify the risk

determine the level of risk of material misstatement

decide on the audit procedures to collect evidence

review the evidence collected and determine if a material error has occured

28
Q

what procedures can an auditor use to collect audit evidence?

A

substantive analytical procedures

test of detail

test of controls

29
Q

why must an auditor evaluate misstatements?

A

to find the effect of identified misstatements on the audit

to find the effect of uncorrected misstatements on the financial statements

30
Q

what steps must the auditor take when misstatements are identified?

A

keep a record of misstatements found

decide whether the audit plan needs revised for misstatements found

ask management to correct misstatements

evaluate the effect on financial statements of uncorrected misstatements

inform management about misstatements

obtain management representation letter

consider effect on audit report for unadjusted misstatements

31
Q

what types of audit procedure can be used to collect audit evidence?

A

inspection

observation

external confirmation

recalculation

re-performance

analytical procedures

inquiry

32
Q

what are the characteristics of good audit evidence?

A

relevant to the assertion being tested

reliable:
from independent sources
obtained directly by the auditor
documentary evidence
original documents
33
Q

what are the key points regarding external confirmations?

A

good source of evidence

must be sent by auditor and received back to auditor

can save time during the audit

positive confirmation, it provides more reliable evidence than negative

34
Q

what are the steps for carrying out effective analytical procedures?

A

ensure analytical procedures can be used

ensure data used in analytical procedures is reliable

form an expectation of figures in financial statements from the data

compare expectation to financial statements.

35
Q

when can the auditor use analytical procedures?

A

start of the audit

during the audit

end of the audit

36
Q

what are the steps for conducting a test using sampling?

A

identify purpose of audit procedure

determine the sample size

select items for testing

perform audit procedures on those items

when required, use alternative items for testing

determine reason for errors found

calculate population misstatement

evaluate results of testing

37
Q

what types of sampling method can an auditor use?

A

random ( use of random number tables)

systematic ( every nth item)

Monetary unit sampling ( sampling unit in $)

haphazard ( uses skill and judgement)

Block (items next to each other i.e everything in april)

38
Q

what is the standard audit work on related party transactions?

A

try to identify related parties

look out for related party transactions during an audit

assess the risk of material misstatement due to related party transactions

keep audit team and management informed concerning related party transactions found

consider effect of transactions found on audit opinion

39
Q

what are related parties?

A

people or entity that have a direct or indirect equity stake in the audited entity

holdings of the audited company in other entities

management or those charged with corporate governance

close family member of those charged with governance

significant business relationship with those charged with governance

40
Q

what types of subsequent events are there?

A

events after the reporting date either;

provide evidence of conditions that existed on that date so statements need adjusted

or

provide evidence of conditions that arose after the date so statements do not need adjusted but disclosures required

41
Q

what are the auditors responsibilities regarding subsequent events?

A

identify events

ensure financial statements are amended as required

42
Q

what are the auditors responsibilities regarding a going concern?

A

obtain sufficient evidence to confirm management are right to use the going concern assumption to prepare financial statements

conclude whether there is material uncertainty regarding the use of the going concern assumption

determine the implications of the audit report if any of the above are identified

43
Q

what are the normal audit procedures with respect to the going concern assumption?

A

ask management to make an assessment of companies going concern status

review plans that show the company should continue trading

evaluate cash-flow forecasts

review any other relevant data

obtain management representation point

44
Q

what is the process of obtaining a management representation letter?

A

auditor decides contents of representation letter

auditor prepares letter and send draft to management

management review and sign the letter

auditor files letter in working papers as audit evidence

45
Q

what are the normal contents of a management representation letter?

A

management confirm statements are prepared in accordance with appropriate framework

management provide auditor with all the information and explanations required for audit

management confirm all transactions recorded in financial statements

46
Q

is the work of internal auditors adequate?

A

review auditors

objectivity
technical competence
due professional care

47
Q

is the internal audit work of sufficient standard?

A

check:

staff have relevant training

staff properly supervised

evidence obtained to support their conclusions

final report based on those conclusions

problems found have been resolved

48
Q

how does the auditor decide if an expert is competent , capable and objective?

A

obtain evidence of:

personal knowledge of the expert

recommendations from other auditors

expert is qualified

expert has published work

49
Q

how does the auditor evaluate the work of an expert?

A

compare to other audit evidence obtained

ensure assumptions and conclusions are reasonable

ensure data used by the expert is complete and accurate

50
Q

what must the auditor report on?

A

whether the statements represent a true and fair view of the entity’s financial position

the financial statements are prepared in accordance with the applicable frame work

other matter prescribed by statute

51
Q

what are the elements of an unmodified audit report?

A

title

address

intro paragraph

managements responsibility for statements

auditors responsibility

auditors opinion

signature of auditor

date of report

auditors address

52
Q

on what grounds is an audit report qualified?

A

auditor concludes from evidence obtained that financial statements are NOT free from material misstatements

auditor is unable to obtain sufficient evidence audit evidence to conclude financial statements are free from material misstatement

53
Q

how does the auditors report change depending on the seriousness of the situation?

A

no material misstatement - unmodified report

Material - except for paragraph for both misstatement and lack of evidence

material and pervasive -

adverse opinion

disclaimer opinion for lack of evidence

54
Q

what types of modified / unqualified reports are there?

A

emphasis of matter - referring to matters in the financial statements

other matters - anything else that the auditor wishes to bring to the attention of the users of the financial statements

55
Q

what are examples of emphasis of matter paragraphs?

A

uncertainty of the outcome of litigation

early application of an accounting standard

ongoing major disasters affecting the company

56
Q

what are the auditors responsibilities regarding comparative information?

A

obtain sufficient and appropriate evidence to ensure comparative information is presented in accordance with the applicable financial reporting framework

report in accordance with auditors reporting responsibilities

57
Q

when does the auditor have to report?

A

auditor will normally report where:

the prior years audit report was qualified and the matter is unresolved

audit evidence obtained during the year suggests a material misstatement in the figures

prior year statements audited by another auditor

58
Q

how can other information differ from the audited financial statements?

A

inconsistent - other information contradicts or is different from the audited financial statements

misstatement of fact - other information does not appear in the financial statements but it is incorrect

59
Q

what does the auditor do if other information is different from audited information?

A

assuming that the financial statements or other information are not changed, then actions are;

other information is correct - qualify opinion on the financial statements

financial statements are correct - issue an other matter paragraph

Auditing (8 decks)

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