AA Knowledge

Question 1

What are the rules for a director or anyone in a position to exert direct and significant influence over the subject matter information of an audited entity moving to the audit firm

Answer 1

In the period under review or the 2 previous periods should not be assigned a position where they can influence and conduct the outcome of the audit for 2 years following the date of leaving the audited entity

Question 2

Where partner leaves audit firm and joins KMP.

Answer 2

If they have acted as QRP or key partner at any time in previous 2 years
- firm should resign as auditors
- not accept appointment until 2 years have elapsed since partners involvement or the former partner leaves the client

Question 3

Where any member of the engagement team joins a client as director/ KMP

Answer 3

If within 2 years of being involved in the audit, firm shall consider the composition of the audit team

Question 4

Immediate family member of audit team is a director, an officer or an employee of the audited entity in position to exert direct and significant influence over the subject matter of the audit engagement

Answer 4

Individual should be removed from the audit team

Question 5

What are partner rotation rules for listed client

Answer 5

-5 on 5 off
- can be extended for another 2 if necessary to safeguard audit quality ( must be disclosed to shareholders)
- 7 on 6 off for engagement quality reviewers, key partners and senior staff
- audit tender carried out every 10 years and mandatory rotation every 20 years

Question 6

What is the long association rules for non listed entities

Answer 6

After 10 years, firm must consider if a reasonable and informed 3rd party would question the partner’s objectivity - if so implement safeguards eg additional partners, quality reviews

Question 7

What are the rules for fees under the FRC ES (3)

Answer 7

• where total fees for audit and non-audit services regularly exceed 15% (10% for listed) the firm must not act as auditor
• if total fees (audit and non-audit) regularly exceed 10% of annual fee income of audit firm (5% for listed). Audit engagement partners should disclose to the ethics partner and TCWG and consider safeguards to reduce threat to independence
• non audit services are permitted, cannot make up over 70% of audit fee calculated on rolling three year basis

Question 8

How do you deal with a conflict of interest

Answer 8

Disclosure of circumstances of conflict to both involved
Obtain informed consent from both clients to act

Safeguards:
Use confidentiality agreements
Establish information barriers (no overlap of teams, physical separation, procedures for when info needs to be based through info barrier)
Regular review of the safeguards
Cease to act where it can’t be managed

Question 9

What are the 3 main elements of quality management

Answer 9

Direction
Supervision
Review

Question 10

How can audit software be used to achieve a more efficient audit

Answer 10

Recalculation of balances which contain multiple line items such as depreciation

Checking arithmetic accuracy of large populations such as FAR

Checking the integrity of formulae used to create reports

Selecting samples for controls testing or test of details

To identify journal entries or unusual transactions which require further investigation

Question 11

What is a good control used for accuracy and valuation assertion

Answer 11

Any type of reconciliation as this will confirm the amounts