CH8 understanding the entity and its environment

Question 2

What is essential to understand about a client to assess auditing risk?

Answer 2

Who they are, what they do, how they do it, any special circumstances, and the integrity and competence of their staff

This understanding is crucial for effective risk assessment in auditing.

Question 3

Fill in the blank: To assess auditing risk, it is important to know _______.

Answer 3

Who they are

Question 4

Fill in the blank: To assess auditing risk, it is important to know _______.

Answer 4

What they do

Question 5

Fill in the blank: To assess auditing risk, it is important to know _______.

Answer 5

How they do it

Question 6

What type of circumstances may affect auditing risk?

Answer 6

Special circumstances, such as specific laws and regulations

These circumstances can significantly impact the auditing process.

Question 7

Why is the integrity and competence of a client’s staff important in auditing?

Answer 7

It affects the overall risk assessment of the client

Competent and honest staff can reduce audit risk.

Question 8

What is the first benefit of understanding a client’s business in relation to auditing?

Answer 8

Be able to assess the skills and competence which the audit team needs

Question 9

Understanding a client’s business helps in planning the audit work to be _______.

Answer 9

[appropriate and efficient]

Question 10

What can be assessed regarding the client’s internal processes when understanding their business?

Answer 10

What controls have been put in place by the client

Question 11

Understanding a client’s business allows auditors to assess any _______ which need special attention.

Answer 11

[significant risks]

Question 12

What type of procedures can be performed as a result of understanding a client’s business?

Answer 12

Analytical procedures

Question 13

Understanding a client’s business helps auditors to comply with _______.

Answer 13

[professional requirements]

Question 14

What external sources can auditors look at to understand the entity and its environment?

Answer 14

• Credit reference agencies
• Industry surveys
• Industry publications such as trade journals
• HM Revenue and Customs Business Economic Notes
• Companies House searches

HM Revenue and Customs Business Economic Notes can be out of date.

Question 15

What files should the audit team review within the firm?

Answer 15

• Last year’s file
• The permanent file
• The correspondence file
• The tax file

These files provide essential background information for the audit process.

Question 16

Who should the audit team talk to for gathering information?

Answer 16

• The partner
• The manager
• The tax person
• Last year’s senior
• The firm’s industry specialist

Engaging with these individuals can provide valuable insights into the audit.

Question 17

What steps should be taken to understand the client during an audit?

Answer 17

• Talk to the people responsible for the area you are auditing
• Read internal correspondence and minutes of board meetings
• Read internal audit reports
• Observe how transactions are recorded and processes are operated
• Look at the website and brochures

These steps help auditors gain a comprehensive understanding of the client’s operations.

Question 18

What must the audit file contain to satisfy the requirements of ISA 315 (UK)?

Answer 18

Sufficient evidence that the auditors have satisfied the requirements of ISA 315

Question 19

What is the first question auditors must answer regarding the entity?

Answer 19

What does the client do?

Question 20

What should auditors consider about the industry in which the client operates?

Answer 20

The characteristics of the industry/environment

Question 21

What aspect of laws and regulations should auditors assess for the client?

Answer 21

If it is governed by specific laws and regulations or at greater risk from general laws

Question 22

What type of relationships should auditors evaluate?

Answer 22

Relationships with external parties, shareholders, stakeholders, trading partners, and providers of finance

Question 23

What financial threats should auditors consider for the client?

Answer 23

Threat from takeover or lack of finance

Question 24

What type of dealings should auditors look for?

Answer 24

Dealings with related parties

Question 25

What aspect of the client's management should auditors assess?

Answer 25

How competent is its management?

Question 26

What should auditors verify regarding the client's internal processes?

Answer 26

If suitable systems and controls are in place

Question 27

What accounting aspect must auditors review?

Answer 27

What accounting policies the client has adopted

Question 28

What is the trend among companies regarding processes and operations?

Answer 28

Companies are increasingly outsourcing processes and operations to third party organisations.

Question 29

Name three activities that may be outsourced by companies.

Answer 29

* Information processing * Maintenance of accounting records * Facilities management

Question 30

What does ISA 402 (UK) Audit Considerations address?

Answer 30

It highlights the issues that must be considered if the auditor discovers that the client has outsourced processes.

Question 31

What is the first main requirement for auditors when a client uses a service organisation?

Answer 31

Obtain an understanding of the services provided by a service organisation, including internal control.

Question 32

What aspects should auditors understand about the services provided by a service organisation?

Answer 32

* The nature of the services provided * The nature and materiality of the transactions processed * The degree of interaction between the activities of the service organization and those of the company * The nature of the relationship between the user entity and the service organization, including the relevant contractual terms

Question 33

What is the second main requirement for auditors regarding service organisations?

Answer 33

Consider access to sources of evidence.

Question 34

What is the third main requirement for auditors when auditing a client that uses a service organisation?

Answer 34

Assess the risks arising.

Question 35

What is the objective of a Type 1 report from a service auditor?

Answer 35

To convey negative assurance regarding management’s description of the service organisation’s system, control objectives, and related controls ## Footnote A Type 1 report assesses the suitability of the design of controls to achieve specified control objectives.

Question 36

What additional information does a Type 2 report provide compared to a Type 1 report?

Answer 36

A Type 2 report provides the service auditor’s opinion on the operating effectiveness of the controls and a description of the service auditor’s tests of the controls and their results ## Footnote This makes Type 2 reports more comprehensive than Type 1 reports.

Question 37

What does a Type 1 report include regarding control objectives?

Answer 37

Management’s description of the service organisation’s system, control objectives, and related controls ## Footnote It assesses the suitability of the design of controls but does not evaluate their operational effectiveness.

Question 38

True or False: A Type 2 report does not include any tests of the controls.

Answer 38

False ## Footnote A Type 2 report includes a description of the service auditor’s tests of the controls and the results.

Question 39

Fill in the blank: A Type 1 report includes a service auditor’s opinion on the _______ of the controls.

Answer 39

suitability of the design ## Footnote This refers to whether the design of the controls can achieve the specified control objectives.

Question 40

What is a key risk of outsourcing payroll related to data?

Answer 40

Loss of data or data protection issues ## Footnote This includes the potential for unauthorized access or breaches of sensitive employee information.

Question 41

What can result from incorrect calculation of wages or taxes when outsourcing payroll?

Answer 41

Late payments leading to fines ## Footnote Accurate calculations are crucial to avoid financial penalties and maintain compliance.

Question 42

How can outsourcing payroll affect a company's public image?

Answer 42

Reputational damage ## Footnote Issues with payroll can lead to employee dissatisfaction and negative publicity.

Question 43

What financial implication may arise from outsourcing payroll?

Answer 43

Increased cost ## Footnote Outsourcing can sometimes lead to higher overall expenses compared to in-house management.

Question 44

What risk associated with financial integrity is heightened by outsourcing payroll?

Answer 44

Risk of fraud ## Footnote Outsourcing can create vulnerabilities that may be exploited by malicious actors.