Chapter 2 Flashcards
What is the job of the directors other than managing the business?
Assessing what business risks face the company and devising the relevant strategies in order to deal with them.
It is not the auditors job to set the strategies to deal with a business risks. However, what must the auditor do?
The auditor must understand the risks facing the business and understand how it will impact on their approach to the audit or other assurance engagement.
What is the general role of the director according to the 2006 companies act?
Act in the way most likely to promote the success of the company, for the benefit of its members as a whole.
Who must safeguard the companies assets as per the companies act 2006? How do they do this?
The directors of the company.
They do this by taking reasonable steps to prevent fraud and other irregularities within a company.
How do directos prevent fraud and other irregularities and thus protect the companies assets? e.g.s?
They do this by implementing controls and systems to safeguard the assets and make sure than they run effectively.
e. g.’s:
1. The safekeeping of documents of title to land and building and other assets.
2. The setting of authority limits, ie, the limitation of what any one individual can do without consulting someone else
3. Implementing other procedures to prevent fraud and reduce the likelihood of error
What is the role of the directors with regard to the books and records of the company?
They are legally required to keep proper accounting records which disclose with reasonable accuracy at any time the financial position of the company.
This requires records of the following:
- Cash payments and receipts
- What the payments and receipts relate to
- The assets (including non-current assets and inventory)
- The liabilities
What is the role of the directors with regard to the preparation and delivery of company financial statements? What must they do when preparing these statements?
they must prepare these statements, which must give a true and fair view of the affairs of the company at the end of the accounting period, and of the P&L of the company for that period.
Directors must:
- select suitable accounting policies and apply them consistently.
- make judgements and estimates which are reasonable and prudent.
- Comply with applicable accounting standards.
- prepare the FS on a going concern basis unless it is inappropriate to assume that the company will continue in business.
Note the directors must also take the prepared FS and present them to the members of the company in general meeting and delivered to companies house within the specified time frame.
Whose responsibility is it that companies follow the laws and the regulations?
Management.
What is the responsibility of the external auditor determined by?
- The requirements of any legislation/regulation under which the engagements are carried out.
- The terms of engagement for the assignment, which will specify the services to be provided.
- Ethical and professional standards.
- Quality control standards
as per the 2006 companies act, what is the responsibility of the external auditor?
- form an independent opinion on the truth and fairness of the annual accounts.
- confirm that the annual accounts have been properly prepared in accordance with the CA 2006.
- state in their auditor’s report whether in the opinion the information given in the directors’ report and strategic report is consistent with the annual accounts.
As per the 2006 companies act, how does an external auditor achieve his objectives?
- the audit is planned properly.
- sufficient appropriate audit evidence is gathered
- the evidence is properly reviewed and valid conclusions are drawn.
the appointment as the companies act auditpr does not lead to responsibility for…?
Who are these the responsibility of?
- The design and operation of the accounting systems
- The maintenance of the accounting records.
- The preperation and accuracy of management information
- The preperation of financial statements
- The id of every error and deficiency in the accounts and the accounting records.
- The prevention of fraud in the company.
- The detection of immaterial fraud in the company/
- Ensuring that the company has complied with the laws and regulations that are relevant to its business (except insofar as it affects the financial statements).
These are the responsibility of management
What are the rights as per the 2006 CA to auditors to ensure that they can fulfill their responsibilities?
- The right of access at all times to the company’s books and accounts.
- The right to obtain any information necessary for the audit from any officer or employee of the company.
- The right to attend any general meeting of the company.
Note it is an offence of the CA 2006 to provide the auditor with false or misleading information.
if an audit firm is contracted to supply non-assurance services to a firm such as assisting with maintenance of its accounting records or perhaps preparing management information, who is responsible?
Management will still remain responsible for all matters like this as the audit firm is only employed as support to management, providing expert assisstance.
Who are the PCAOB and what are they entitled to do?
Public company accounting oversight board
They were set up to inspect audit files of major us listed companies and us subsidaries. Therefore, auditors of subsidaries of US companies must register (for a fee) with PCAOB and are liable to inspection.
What are the two types of tests? And how do they work?
Tests of control and tests of detail
The more resiliance that can be put on controls (assessed by testing controls), the fewer tests of detail may be carried out.
What is an error?
An unintentional misstatement in financial statements, including the omission of an amount or a disclosure.
What are internal controls?
“The process designed, implemented and maintained by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of an entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations. The term “controls” refers to any aspects of one or more of the components of internal controls.”
by testing internal controls, what can you tell about the company?
This tells you that the system is capable of preventing or detecing and correcting errors and that it operates efficiently. Thus, the auditor will be able to conclude that the system is strong and the risk of FS containing errors is reduced.
This is also means that lower tests of detail will be carried out.
If an auditor finds material weakness, what must they do?
- Report these finding to management
- Carrying out additional tests of detail to uncover any potential errors as a result of weakness
Who is responsible for drawing conclusions as to whether the FS are free from material misstatements? and what causes these?
Auditors. This is cause by fraud.
What are the auditors responsibilities when it comes to fraud?
- Assessing the risks of material misstatement
- Discussing the susceptibility of the FS to material misstatement caused by fraud.
What are the auditors responsibilities when it comes to fraud?
- Assessing the risks of material misstatement
- Discussing the susceptibility of the FS to material misstatement caused by fraud.
What should auditors follow in order to have a reasonable expectation of detecting fraud or error?
ISA (UK) 240
The audiotr must provide ….. that the FS are free from material misstatement, whether caused by error or fraud
Reasonable assurance. the auditor cannot provide complete assurance as audit testing is not designed to provide this assurance.
What shoulf the auditor do should they suspect fraud?
If they identify misstatement then they should consider the implications of this on other parts of the audit. particularly managmenet representations which may not be trustworthy igf fraud is detected.
what must auditors get in writing?
That management have aknowledged its responsibility to design and implement internal controls to prevent and detect fraud and that management has disclosed any known fraud by management.
They must also make sure management say in writing the results of its asessment and whether the FS can be materially affected by fraud.
During the course of your audit of Slipstream Ltd the credit controller asks for a private interview with you. During this interview, she makes it known that she suspects the chief accountant of misappropriating company funds received from debtors and altering the books.
What steps would you take to enable you to assess whether the credit controller’s suspicions are reasonable?
- review and obtain photocopies of docs which have aroused her suspicions.
- enquire in to the reasons for altered pages in books/documents etc
- investigate any apparent override/circumvention of company procedure, eg, cancelling a sales invoice instead of raising a credit note
- Review of previous management letters for any weaknesses facilitating misappropriations
- Consider credit controller’s motives for putting chief accountant’s standard of living; make enquiries about his lifestyle.
- Consider whether past dealings with chief accountant have ever cast doubt on his integrity.
- Increase analytical procedures on revenue and receivables, eg, monthly revenue/receipts of major customers/extend circulisation if trade receivables collection period has increased.
- Discuss with engagement partner, who may wish to discuss with client (eg board of directors)
During the course of your audit of Slipstream Ltd the credit controller asks for a private interview with you. During this interview, she makes it known that she suspects the chief accountant of misappropriating company funds received from debtors and altering the books.
What steps would you take to enable you to assess whether the credit controller’s suspicions are reasonable?
- review and obtain photocopies of docs which have aroused her suspicions.
- enquire in to the reasons for altered pages in books/documents etc
- investigate any apparent override/circumvention of company procedure, eg, cancelling a sales invoice instead of raising a credit note
- Review of previous management letters for any weaknesses facilitating misappropriations
- Consider credit controller’s motives for putting chief accountant’s standard of living; make enquiries about his lifestyle.
- Consider whether past dealings with chief accountant have ever cast doubt on his integrity.
- Increase analytical procedures on revenue and receivables, eg, monthly revenue/receipts of major customers/extend circulisation if trade receivables collection period has increased.
- Discuss with engagement partner, who may wish to discuss with client (eg board of directors)
