CH11 performance of an audit Flashcards
(106 cards)
1
Q
designing audit procedures
A
Verb
What
Why
How
2
Q
What should be discussed with management regarding revenue fluctuations?
A
The reason for the increase (or decrease) in revenue to ensure reasonable.
3
Q
What is the purpose of obtaining a breakdown of revenue in financial statements?
A
To trace it to signed GDN dated pre-year end to ensure occurrence.
4
Q
What should be inspected to ensure completeness of revenue?
A
A sample of pre year end GDN and ensure the corresponding sales invoice has been included in revenue.
5
Q
What is the purpose of inspecting sales invoices?
A
To ensure they have been recognised in revenue correctly to ensure accuracy.
6
Q
What should be done for sales in foreign currencies to ensure accuracy?
A
Agree the translation rate used to a reliable external source and reperform the calculation.
7
Q
What should be reviewed post year-end to ensure occurrence/accuracy?
A
Credit notes for evidence of the reversal of revenue recorded pre year-end.
8
Q
What should be discussed with management regarding costs?
A
The reason for the increase (or decrease) in costs to ensure reasonable.
9
Q
What is the purpose of obtaining a breakdown of purchases in financial statements?
A
To trace it to signed GRN dated pre-year end to ensure occurrence.
10
Q
What should be inspected to ensure completeness of purchases?
A
A sample of pre year end GRN and ensure the corresponding purchase invoice has been included in purchases.
11
Q
What should be done to ensure accuracy of purchase invoices?
A
Inspect a sample of purchase invoices and ensure they have been recognised in purchases correctly.
12
Q
What should be agreed for purchases in foreign currencies?
A
The translation rate used to a reliable external source and reperform the calculation to ensure accuracy.
13
Q
What should be reviewed post year-end regarding costs?
A
Credit notes for evidence of the reversal of costs recorded pre year-end to ensure occurrence/accuracy.
14
Q
What should be done to ensure valuation of PPE/intangible assets?
A
Obtain a list of additions in the year and vouch amounts recognised to purchase invoices.
15
Q
What should be done for foreign currency purchases of physical assets?
A
Reperform the foreign currency translation using a rate from a reliable independent source.
16
Q
What should be ascertained from management regarding asset depreciation?
A
The basis for estimating useful lives and consider whether these are reasonable.
17
Q
What should be recalculated to ensure valuation of assets?
A
The depreciation charge on a sample of assets.
18
Q
What should be identified and traced to ensure completeness of physical assets?
A
A sample of physical assets to the asset register.
19
Q
What should be done to ensure existence of assets in the register?
A
Trace them to the physical asset.
20
Q
What should be inspected regarding assets disposed?
A
Sales invoices to ascertain if estimates of residual value are reasonable.
21
Q
What should be inspected to ensure authorized acquisitions and disposals?
A
Board minutes regarding any acquisitions and disposals.
22
Q
What should be inspected in P&L accounts for capitalized items?
A
Repairs and renewals for items that should be capitalised.
23
Q
What should be ensured regarding assets capitalised in the year?
A
They are capital expenditure per the relevant standard (IAS 16/ IAS 38).
24
Q
What should be done during the inventory count?
A
Observe the approach, count instructions, and how movements are being dealt with.
25
What should be inspected to confirm completeness of physical inventory?
A sample of physical inventory and compare to the number counted on the stock sheets.
26
What should be inspected to ensure existence of inventory?
A sample of items counted on the stock sheets to the physical inventory.
27
What should be discussed with management regarding NRV?
The basis of any items reduced to NRV to ensure reasonable.
28
What should be obtained regarding inventory reduced to NRV?
Written representation to confirm completeness and reasonableness.
29
What should be inspected post year-end for inventory?
Sales invoices for a sample of inventory to ensure correctly valued.
30
What should be obtained to confirm existence of trade receivables?
Direct confirmation of a sample of trade receivables at the year end.
31
What should be reviewed after year end related to trade receivables?
Cash received which related to year end trade receivables to confirm valuation.
32
What should be reviewed to identify overdue balances in trade receivables?
Aged receivables analysis and discuss with management the basis of any allowance.
33
What should be inspected post year end regarding credit notes?
To identify if they relate to current year invoices to ensure valuation and rights.
34
What should be compared to ensure correct cut-off for sales invoices?
The dates on GDN to the dates on sales invoices.
35
What should be obtained regarding allowance against receivables?
Written representation to confirm completeness and reasonableness.
36
What should be done to confirm completeness of trade payables?
Obtain a sample of supplier statements based on supplier significance and reconcile back to supplier ledger.
37
What should be compared to ensure correct cut-off for purchase invoices?
The dates on GRN to the dates on the purchase invoices.
38
What should be inspected for overseas purchase invoices?
Ensure they have been translated at an appropriate exchange rate.
39
What should be examined regarding going concern?
Profit and cash flow forecasts for 12 months from date of approval of the financial statements.
40
What should be considered when examining forecasts for going concern?
The reasonableness of any assumptions underlying the forecasts.
41
What should be performed on key variables in going concern analysis?
Sensitivity analysis on changes in income, exchange rates, purchase prices.
42
What should be inspected post year-end regarding sales/profitability?
Management accounts for changes.
43
What should be inspected for evidence of complaints or legal liabilities?
Customer, solicitor, bank correspondence.
44
What should be obtained regarding going concern assumptions?
Written representation to confirm completeness and reasonableness.
45
Audit tests - Revenue
Discuss with management the reason for the increase (or decrease) in revenue to ensure
reasonable.
Obtain a breakdown of revenue in the financial statements and trace it to signed GDN dated
pre-year end to ensure occurrence.
Inspect a sample of pre year end GDN and ensure the corresponding sales invoice has been
included in revenue to ensure completeness.
Audit and Assurance 11: Performing and audit engagement 93
Inspect a sample of sales invoices and ensure they have been recognised in revenue correctly to
ensure accuracy.
Inspect a sample of sales in foreign currencies, agree the translation rate used to a reliable
external source and reperform the calculation to ensure accuracy.
Review post year-end credit notes for evidence of the reversal of revenue recorded pre yearend to ensure occurrence/accuracy.
46
Audit tests - Purchs/Exps
Discuss with management the reason for the increase (or decrease) in costs to ensure
reasonable.
Obtain a breakdown of purchases in the financial statements and trace it to signed GRN dated
pre-year end to ensure occurrence.
Inspect a sample of pre year end GRN and ensure the corresponding purchase invoice has been
included in purchases to ensure completeness.
Inspect a sample of purchase invoices and ensure they have been recognised in purchases
correctly to ensure accuracy.
Inspect a sample of purchases in foreign currencies, agree the translation rate used to a reliable
external source and reperform the calculation to ensure accuracy.
Review post year-end credit notes for evidence of the reversal of costs recorded pre year-end to
ensure occurrence/accuracy
47
Audit tests - PPE/Intangs
Obtain a list of additions in the year and vouch amounts recognised to purchase invoices to
ensure valuation.
Inspect a sample of items purchased from overseas suppliers, reperform the foreign currency
translation using a rate from a reliable independent source to ensure valuation.
Ascertain from management the basis for estimating useful lives and consider whether these
are reasonable. Recalculate the depreciation charge on a sample of assets to ensure valuation.
Identify a sample of physical assets and trace then to the asset register to ensure completeness.
Identify a sample of assets in the register and trace them to the physical asset to ensure
existence.
Inspect sales invoices of assets disposed ascertain if estimates of residual value are reasonable.
Inspect board minutes regarding any acquisitions and disposals to ensure authorised.
Inspect other P&L accounts such as repairs and renewals for items that should be capitalised to
ensure completeness and classification/presentation.
Inspect assets capitalised in the year and ensure they are capital expenditure per there relevant
standard (IAS 16/ IAS 38) to ensure correctly classified and presented.
48
Audit tests - Inventory
Attend the inventory count and observe the approach, the count instructions being followed,
how movements are being dealt with, how slow-moving lines are being identified, whether
counting in pairs…. to ensure existence and cut-off.
Inspect a sample of physical inventory and compare to the number counted on the stock sheets
to confirm completeness.
Inspect a sample of items counted on the stock sheets to the physical inventory to ensure
existence.
Discuss with management the basis of any items reduced to NRV to ensure reasonable.
Obtain written representation regarding the inventory reduced to NRV to confirm completeness
and reasonableness.
Inspect post year-end sales invoices for a sample of inventory to ensure recognised at lower of
cost vs NRV therefore correctly valued.
49
Audit tests - TRs
Obtain direct confirmation of a sample of trade receivables at the year end to confirm existence
and right to receive cash.
Review cash received after the year end which related to year end trade receivables to confirm
valuation.
Review aged receivables analysis to identify overdue balances and discuss with management
the basis of any allowance against the receivables to ensure reasonable.
Inspect post year end credit notes to identify if they relate to current year invoices to ensure
valuation and rights.
Compare the dates on GDN to the dates on sales invoices to ensure the sales invoice is in the
correct period ensuring correct cut-off.
Obtain written representation regarding the allowance against receivables to confirm
completeness and reasonableness.
50
Audit tests - TPs
Obtain a sample of supplier statements based on supplier significance and reconcile back to
supplier ledger to confirm completeness.
Compare the dates on GRN to the dates on the purchase invoices to ensure the purchase
invoice is in the correct period ensuring correct cut-off.
Inspect a sample of overseas purchase invoices and ensure they have been translated at an
appropriate exchange rate to ensure valuation.
51
***Audit tests - GC
Examine profit and cash flow forecasts for 12 months from date of approval of the financial
statements to ascertain if the company can: - pay its debts as they fall due - meet any covenants.
Consider the reasonableness of any assumptions underlying in the forecasts. Such as major
customers being replaced, Fx rates, loan repayments being made on time, overdrafts not being
breached.
Perform sensitivity analysis on key variables, such as – changes in income, exchange rates,
purchase prices.
Inspect post year-end management accounts for changes in sales/profitability
Inspect customer, solicitor, bank correspondence for evidence of complaints, legal liabilities,
withdrawal of finance/relationship with bank.
Obtain written representation regarding going concern assumptions to confirm completeness
and reasonableness
52
What does ISA 610 (UK) state regarding the responsibility of the external auditor?
The external auditor has sole responsibility for the opinion expressed.
53
What are some areas where internal audit work may assist the external auditor?
Planning, interim testing, direct assistance.
54
In which area does ISA 610 (UK) allow the external auditor to use internal audit work?
Planning, specifically in the identification and assessment of risk and documentation of internal controls.
55
What is interim testing in the context of external auditing?
Tests done in the year that may include internal control tests and walkthroughs.
56
True or False: ISA 610 (UK & Ireland) permits external auditors to request internal auditors to conduct specific substantive procedures.
False.
57
How can an effective internal audit function impact external audit procedures?
It may reduce, modify, or alter the timing of external audit procedures.
58
Fill in the blank: An effective internal audit function can never _______ external audit procedures entirely.
[eliminate]
59
What does the ISA require the external auditor to determine regarding internal auditors?
Whether the work of internal auditors is likely to be adequate for purposes of the audit.
60
What should the external auditor assess about the internal audit function?
Objectivity, competence, and systematic and disciplined approach.
61
What aspects should be considered under the objectivity of the internal audit function?
* Status of the function within the entity
* Reporting structure (e.g., to Audit Committee)
* Restrictions placed on their function
* Management's actions on internal audit recommendations.
62
What factors are evaluated to determine the competence of internal auditors?
* Adequate resources
* Technical training and proficiency
* Required financial reporting knowledge
* Membership in a professional body.
63
What does a systematic and disciplined approach in internal audit involve?
* Proper planning
* Performance
* Supervision
* Review
* Documentation
* Obtaining sufficient and appropriate evidence
* Reaching reasonable conclusions.
64
What should the external auditor do if any aspect of the internal audit function is lacking?
Not use the work of the internal audit function.
65
What must the external auditor evaluate to use specific work of the internal auditors?
Evaluate and perform audit procedures on that work to determine its adequacy for the external auditor’s purpose.
66
What does ISA 620 state about management's expert in preparing financial statements?
Management's expert influences the auditor's decision on using an auditor's expert based on factors such as:
* Nature, scope, and objectives of the management's expert's work
* Employment status of the management's expert
* Extent of management's control over the expert's work
* Competence and capabilities of the management's expert
* Subject to technical performance standards or other requirements
## Footnote
ISA 620 outlines the considerations that auditors must take into account when management employs an expert in financial statement preparation.
67
Who has sole responsibility for the audit opinion expressed according to ISA 620?
The auditor has sole responsibility for the audit opinion expressed, and this responsibility is not reduced by the use of an auditor's expert.
## Footnote
This emphasizes the auditor's independence and accountability in the audit process.
68
What are the key considerations before relying on an auditor's expert?
Before relying on an auditor's expert, the auditor should consider:
* Competence
* Capabilities
* Objectivity
## Footnote
Competence refers to necessary qualifications, capabilities include time and resources, and objectivity pertains to the lack of bias.
69
Fill in the blank: The auditor must ensure that experts used have the necessary _______.
[qualifications]
70
True or False: The auditor's use of an auditor's expert reduces their responsibility for the audit opinion.
False
71
What does the term 'objectivity' refer to in the context of an auditor's expert?
Objectivity refers to the lack of bias, conflict of interest, or influence of others.
## Footnote
Objectivity is crucial for maintaining the integrity of the audit process.
72
What factors influence the auditor's decision on whether to use an auditor's expert according to ISA 620?
Factors influencing the auditor's decision include:
* Nature, scope, and objectives of the work
* Employment status of the expert
* Management's control over the work
* Expert's competence and capabilities
* Compliance with technical standards
## Footnote
These factors help assess the reliability of the expert's work.
73
What must the Group Auditor understand about the Component Auditor?
Whether the CA understands ethics relevant to the group audit and can be independent
## Footnote
This includes assessing the ethical standards and independence of the CA in relation to the group audit.
74
What aspects of competence must the Group Auditor evaluate for the Component Auditor?
Whether they have sufficient time to do appropriate audit work
## Footnote
Competence also includes the skill level and experience of the CA.
75
What is a key consideration for the Group Auditor when working with the Component Auditor?
Whether the GA can work with the CA sufficiently to ensure sufficient appropriate audit evidence is obtained
## Footnote
Effective collaboration is essential for gathering the required audit evidence.
76
In what type of environment should the Component Auditor operate?
In a regulatory environment
## Footnote
This ensures compliance with applicable auditing standards and regulations.
77
What action does the Group Auditor take if the component is assessed as low materiality and risk?
Group Auditor will send a questionnaire to Component Auditor
## Footnote
The questionnaire details their approach, opinion on internal controls, and modifications identified.
78
What should the Group Auditor determine if the component is assessed as high materiality and risk?
Who does the work
## Footnote
This involves deciding whether the CA or GA will perform the audit work based on risk assessment.
79
What are the requirements for the work done by the Component Auditor when assessed as high materiality and risk?
GA to review the working papers
## Footnote
This is to ensure compliance with auditing standards and the adequacy of the audit evidence.
80
What standards should the approach of the Group Auditor follow?
ISAs (International Standards on Auditing)
## Footnote
Following ISAs ensures adherence to globally recognized auditing practices.
81
What must be obtained to satisfy the Group Auditor's requirements?
Sufficient & appropriate evidence
## Footnote
This evidence supports the conclusions drawn in the audit process.
82
What can the Group Auditor do if they are unsatisfied with the audit work?
Request further audit procedures by CA or GA can perform some
## Footnote
This ensures that all necessary procedures are completed to satisfy audit requirements.
83
What does ISA 540 (UK) emphasize regarding audit evidence?
To obtain sufficient and appropriate audit evidence to ensure estimates are reasonable.
84
What types of risks should auditors consider when assessing estimates?
Both inherent risks and control risks.
85
What are inherent risks in the context of accounting estimates?
* Level of estimation uncertainty
* Complexity
* Subjectivity
* Motives to understate or overstate
* Impact on financial statements leading to bias
* Changing approach to a more favourable result.
86
What are control risks related to the creation of estimates?
* Methods used to establish the estimate
* Reliability of data used to create the estimate
* Who calculated the estimate, are they objective?
* Were experts used, are they credible?
* Existence of segregation of duties
* Existence of change controls to methodologies.
87
Fill in the blank: Auditors should consider the risk of _______ which includes inherent risks and control risks.
material misstatement
88
True or False: The assessment of risk does not impact the auditor’s approach.
False
89
What can motives to understate or overstate an estimate impact?
The financial statements, leading to bias.
90
What is a potential consequence of a changing approach to estimates?
It may lead to a more favourable result.
91
What does the reliability of data refer to in control risks?
The dependability of the data used to create the estimate.
92
Who should ideally calculate the estimate to ensure objectivity?
An objective individual.
93
What role do experts play in the context of control risks?
Their credibility is important for the reliability of the estimate.
94
Fill in the blank: The existence of _______ is crucial in mitigating control risks.
segregation of duties
95
What is the importance of change controls in methodologies?
To ensure the integrity of the estimation process.
96
What is the first audit approach based on assessed risk?
Test the controls
## Footnote
Testing controls indicates their effectiveness, such as audit committee approval for material estimates.
97
What should be considered regarding subsequent events in the audit approach?
Some estimates may materialise post year end into actual transactions
## Footnote
This means the auditor should evaluate how estimates hold up against actual outcomes after the reporting period.
98
How can historical accuracy be used in the audit approach?
Compare the current estimate to actual outcomes from an equivalent estimate used last year
## Footnote
This helps assess the reliability of management's estimates.
99
Why is compliance with relevant accounting standards important in the audit approach?
Some standards define how estimates should be created and may prohibit some techniques
## Footnote
Ensuring compliance helps maintain the integrity of financial reporting.
100
What does being sceptical involve in the audit approach?
Consider existence of other (maybe better) techniques and their outcomes
## Footnote
Auditors should question changes in approach and seek alternative methods.
101
What verification should be performed regarding data used by management?
Ensure any underlying data used is reliable
## Footnote
Reliable data is crucial for accurate estimates.
102
What should be scrutinised if a management expert is used?
Their objectivity, approach, experience, and qualifications
## Footnote
Doubts about the expert may necessitate the auditor appointing their own expert.
103
What is the purpose of creating an auditor’s point estimate?
To reperform management's estimate and compare the two
## Footnote
This helps determine whether management's estimate is reasonable.
104
What must be ensured regarding related disclosures in financial statements?
Estimates require disclosure notes indicating the approach and a reconciliation from opening to closing balance
## Footnote
Adequate disclosures enhance transparency.
105
What is included in the written representation letter concerning estimates?
Confirmation of estimates due to the judgements involved
## Footnote
This supports the auditor's work on the estimates.
106
Explain how the auditor would approach the audit of a warranty provision
