ew dit Flashcards
(184 cards)
1
Q
What are the three concepts for understanding the purpose of an audit?
A
Principal-Agent relationship
Information Asymmetry
Assurance
2
Q
What are five elements of assurance?
A
Three-party relationship
Appropriate subject matter
Suitable criteria
Sufficient appropriate evidence
A written assurance report
3
Q
Which parties are included in the three-party relationship?
A
Practitioner
Responsible party
Intended users
4
Q
What are for qualities of someone with professional scepticism?
A
Questioning mind
Being alert to conditions which may indicate errors
Critical assessment of evidence
Graceful
5
Q
What are the seven different types of auditors?
A
External auditor
Internal auditor
Compliance
Forensic
Environmental and Sustainability Practitioner
Value for money
Sustainability Assurance
6
Q
What are KPIs?
A
Financial AND non-financial measures that monitor strategic performance
7
Q
What do KPIs do?
A
Identify goals of organisation
Measure the performance
Assess whether the goal has been achieved
8
Q
What gives credibility to the information published?
A
Assurance engagement
9
Q
What does the Companies Act 2006 say about audit?
A
It’s communication with shareholders
Requirement for an audit (precaution)
Auditor is qualified accountant specially trained in auditing and who’s independent of the company
10
Q
Of which three criteria can a company meet two of to be exempt from audit?
A
An annual turnover of no more than £10.2m
Assets worth no more than £5.1m
50 or fewer employees on average
11
Q
What must the directors say on the face of the SOFP in case the company is exempt from audit?
A
The company was entitled to the exemption
No member holding 10% or more of the voting rights have requested an audit
12
Q
Which types of companies are excluded from having an audit exemption?
A
Public companies
Subsidiary of a group that isn’t small
Financial institutions
Companies regulated under Financial Services Act
Trades Unions, employers’ associations
13
Q
What does IFAC stand for?
A
International Federation of Accountants
14
Q
What does IESBA stand for?
A
International Ethics Standards Board for Accountants
15
Q
What does IESBA do?
A
Provides a code of ethics
16
Q
What does IAASB stand for?
A
International Audit and Assurance Board
17
Q
What does ISA stand for?
A
International Standards on Auditing
18
Q
What does ISQM stand for?
A
International Standards on Quality Management
19
Q
What does this term come from?
What does it mean?
Who came up with the concept and application?
What are these questions an example of?
A
Professional Scepticism
20
Q
What does FRC stand for?
A
Financial Reporting Council
21
Q
What is the national regulator responsible for overseeing the accountancy profession in the UK?
A
The FRC
22
Q
What is the mission of the FRC?
A
To regulate accountants and auditors
23
Q
Which body is going to replace the FRC?
A
ARGA
24
Q
What does ARGA stand for?
A
Audit, Reporting and Governance Authority
25
Which are the only four qualifying bodies which can allow an accountant to audit companies?
ICAS
ICAEW
ACCA
AIA
26
What are the four supervisory bodies of audit?
ICAS
ICAEW
ACCA
27
What does recognised supervisory body (for audit) mean?
Bodies recognised by FRC as being suitable to control and monitor auditors
28
What two things do auditors need to register?
Appropriate qualification
Professional indemnity insurance
29
What four rules do the recognised supervisory bodies maintain and enforce?
Eligibility
Supervision
Discipline
Monitoring
30
What are 7 benefits of audit?
Add credibility to financial statements / subsequent investment
Enables borrowing
Reassurance for shareholders
High professional standards
Independent regulation of auditing profession
Discover errors
Deters fraud
31
What are 6 limitations of audit?
Opinion on truth and fairness, not correctness
Judgement
Duty of care not owed to all users of financial statements
Time lapse between financial year and audited financial statements
Audit fee received from company being audited
Some companies exempt from audit
32
What are the auditor's two responsibilities according to the Companies Act?
To state whether FS have been prepared in accordance with the Companies Act
To give opinion on whether FS give a true and fair view of company's affairs at balance sheet rate and of its P&L for the financial period
33
What are the statutory rights of the auditor according to the Companies Act?
Access to books, accounts and vouchers of company
Evidence as they think necessary
-Imprisonment up to 2 years or unlimited fine for deception by employees
Receive all notices of any general meeting
-Attend general meetings
-Be heard at general meetings on issues relating to auditor
34
When are auditors typically appointed?
At general meeting when accounts are 'laid'
35
What companies don't need to appoint an auditor?
Dormant companies
Private companies electing to dispense with laying of accounts
36
What happens if a company that needs to appoint an auditor fails to?
Results in appointment by Secretary of State
37
If old turnover was £800k, then a new client fee was gained of £200k, what is the new turnover?
What is the % fee dependence then on this client?
£1M
20%
38
What are the FRC limits on fee dependence?
10% for public company
15% for non-public company
39
What 5 factors must an auditor consider before accepting appointment?
Qualification/competence
Legal and ethical (e.g. fee dependence)
Adequate resources
Client credentials
Professional clearance
40
Are auditors always appointed by shareholders?
Almost always
But first auditor decided by first GM
41
Who is still likely to have an influence over appointment and remuneration?
Directors
42
What is the engagement letter?
A contract
43
What are the 5 points that need agreed upon in the engagement letter?
Objective and scope
Responsibilities of auditor
Responsibilities of management
Financial reporting framework
Describes auditor report
44
What are some responsibilities of management per the engagement letter?
Preparation of financial statements
Provide auditor with all information required
45
What are some responsibilities of auditors per the engagement letter?
In accordance with ISAs
Planning, sampling, chance of errors
Weaknesses to be reported
Special circumstances
46
What are three technological factors that impact acceptance?
Electronic accepting system
Aid with understanding client
Digital engagement letter management
47
What must first occur for an auditor to be removed?
A majority vote for it at a general meeting of the company
48
What is the notice period that must be given to auditors prior to removal?
28 days notice
49
In removal, which parties must be sent copies of the resolution from the company?
Auditor being removed
Proposed replacement
50
Is the auditor entitled to speak at the general meeting when their removal is decided?
Yes
51
Aside from the general meeting deciding their removal, where else does the removed auditor get a chance to speak?
Meeting in which replacement is appointed
Meeting in which financial statements are laid on which auditor would've reported
52
In removal/resignation, what must the auditor do?
Provide a statement to the company within 14 days
53
In the case of a public interest company, who must the auditor send their statement of ceasing to hold office tp?
The company
FRC
Companies house if the company does not apply to court under S520
54
In the case of a public or private company, who must the auditor send their statement of ceasing to hold office tp?
The company
The RSB of the outgoing auditor
55
In the real world, what are three realities of auditor appointment?
Tender process
Auditors are in business to make money
Strategy to lower the audit fee
56
What are the 5 principles of IFAC's Code of Ethics? OBICC
Objectivity
Behaviour
Integrity
Competence
Confidentiality
57
What are 3 key issues the FRC Ethical Standard 2019 gives guidance for?
Integrity
Objectivity
Independence
58
In the FRC Ethical Standard 2019, what are three examples of the first item?
Trustworthy
Honest
Fair
(Integrity)
59
In the FRC Ethical Standard 2019, what's an example of the second item?
Impartiality
(Objectivity)
60
In the FRC Ethical Standard 2019, what's the third item?
Independence
61
In the FRC Ethical Standard 2019, what's the second item?
Objectivity
62
In the FRC Ethical Standard 2019, what's the first item?
Integrity
63
What does Part A of the FRC Ethical Standard 2019 cover?
Overarching Principles & Supporting Ethical Provisions
64
What does Part B of the FRC Ethical Standard 2019 cover?
Specific requirements and examples
Sections 1-6
65
What are the 6 general requirements of Part B - Section 1 of the FRC Ethical Standard 2019?
Ethics Partner
Breaches
Non-involvement in Management Decision-taking
Threats to Integrity, Objectivity and Independence
Threats:
Identify threat then apply safeguards to eliminate or reduce threat
Communicate with those charged with governance
66
What are 6 threats to integrity, objectivity and independence (e.g. of an audit)?
Self-interest
Self-review
Management
Advocacy
Familiarity
Intimidation
67
In Part B of the FRC Ethical Standard 2019, what does section 2 refer to?
Financial, business, employment and personal relationships
68
In Part B of the FRC Ethical Standard 2019, what does section 3 refer to?
Long association with engagements (and with relevant entities to engagements)
69
In Part B of the FRC Ethical Standard 2019, what does section 4 refer to?
Fees, remuneration and evaluation policies, gifts and hospitality, litigation
70
In Part B of the FRC Ethical Standard 2019, what does section 5 refer to?
Non-audit/additional services
71
In Part B of the FRC Ethical Standard 2019 Section 2, what does it restrict financially?
Shares
Loans (unless from a bank and loan is under normal business terms)
72
In Part B of the FRC Ethical Standard 2019 Section 2, which parties do the restrictions apply to?
Audit firm
Partners in audit firm
Covered persons
Any person closely associated with any partner or covered person
73
In Part B of the FRC Ethical Standard 2019 Section 2, what does it restrict commercially?
Common commercial interest (except if tx is under normal business terms and immaterial to both parties)
74
In Part B of the FRC Ethical Standard 2019 Section 2 regarding employment, when may employment threats arise?
Audit staff on loan to client
Audit staff leaving to join client
Family members employed my client
Client's staff leaving to join audit firm
75
In Part B of the FRC Ethical Standard 2019 Section 3, what is the length of association restriction for a private company?
10 years with engagement partner
Must have a good justification
76
In Part B of the FRC Ethical Standard 2019 Section 3, what is the length of association restriction for a listed company?
5 years for engagement partner
7 years for key partner
If more than 7 years for senior staff, must have good justification
77
In Part B of the FRC Ethical Standard 2019 Section 4, what is the dependence restriction on one client?
10% Listed
15% Private
78
In Part B of the FRC Ethical Standard 2019 Section 4, what three things does it cover?
Dependence on one client
Overdue fees
Selling of non-audit fees
Gifts
79
In Part B of the FRC Ethical Standard 2019 Section 4, what is the restriction on selling non-audit fees?
Shouldn't be criteria for performance evaluation or part of remuneration for audit staff
80
In Part B of the FRC Ethical Standard 2019 Section 4, what is the guidance regarding gifts?
Accept only if insignificant value
Accept/give only if reasonable frequency, nature and cost
81
In Part B of the FRC Ethical Standard 2019 Section 5, what does it cover?
Non-audit services
82
In Part B of the FRC Ethical Standard 2019 Section 5, what 2 things should you look out for when providing non-audit services?
Whether it's inconsistent with audit objectives
Threat to objectivity and integrity
83
In Part B of the FRC Ethical Standard 2019 Section 5, what non-audit services are FORBIDDEN?
Designing or implementing accounting system
Providing accounting services for listed companies
84
In Part B of the FRC Ethical Standard 2019 Section 5, what is to be considered on a case-by-case basis?
Certain tax and corporate finance services
85
In Part B of the FRC Ethical Standard 2019 Section 6, what does it cover?
Provisions available for audits of small entities
86
What does the UK Corporate Governance Code require?
That public companies have audit committees
Audit committees are necessary for listing on London Stock Exchange
Audit committee approves audit firm doing non-audit work
Made up of non-executive directors
87
Who might want to sue an auditor?
Shareholders
Banks
Creditors
Company itself
88
Why are auditors often considered to have 'deep pockets' and are hence more likely to get used?
Indemnity insurance
An audit partnership will have unlimited joint and several liability
89
What 3 factors need proving to sue the auditor?
Auditor has been negligent
Auditor owes duty of care to plaintiff
Plaintiff suffered loss due to auditor's negligence
90
What are directors' 10 financial responsibilities?
Space stars
SSS-GAL
State applicable accounting standards were followed
Protect assets ofcompany
Accurate records
Compliant with CA 2006
Ensure and give statement regarding internal controls
State whether company is going concern
True and fair FS
Accounting policies which are suitable#
Reasonable judgements and estimates
State legal responsibilities in FS
91
What is the auditor's responsibility?
To give their opinion on whether the FS give a true and fair view
92
What is the auditor's duty of care?
Perform audit with reasonable skill and care
Comply with legislation (e.g. Companies Act 2006)
Comply with Auditing Standards
Engagement Letter sent to company to identify duties of the auditor
93
Which statutory laws are auditors liable to?
Companies Act 2006
Theft Act 1968
94
Which common law rulings are auditors liable to?
Civil wrong if client or other party suffers due to auditor not meeting statutory duties
Criminal act if auditor deliberately signs incorrect audit report
Penalties for breaching statute - fine or imprisonment
95
Which case is the current legal precedent regarding the auditor's duty to third parties in common law?
Caparo Case
96
Which court judged the Caparo case?
The House of Lords
97
Between which parties was the Caparo case?
Caparo Industries plc v Dickman & Others (1990)
98
In the Caparo case, who were auditors found to owe a duty of care to?
The Company
Shareholders as a collective
99
In the Caparo case, who were auditors found NOT to owe a duty of care to?
Shareholders as individuals
Future shareholders
Third parties
100
What did the Caparo decision clarify?
Audit Report is not a guarantee as to accuracy of financial statements or financial soundness of company
Not all users are owed a duty of care by auditors
101
What is the current legal precedent due to the Caparo case, regarding an auditor failing to meet their duty of care?
Foreseeable economic loss arising from lack of duty of care
Close and direct relationship between defendant and plaintiff
Imposition of liability to be fair, reasonable and just in circumstances
102
How can we limit an auditor's liability?
Become a limited company
Become a limited liability partnership
103
What are the pros and cons for an auditor's liability as a limited company?
Limited liability
But loss of confidentiality because:
Financial statements must be audited by another auditor
Financial statements lodged with Registrar of Companies
104
What are benefits for an auditor's liability in a limited liability partnership?
Separate legal entity
Individual partner's assets are protected
105
What is the Auditor Liability Limitation Agreement?
An agreement in which shareholders approve the maximum liability amount each year
Voluntary under UK legislation
Amount must be fair and reasonable
106
Which case relates to audit report disclaimers?
Royal Bank of Scotland vs Bannerman Johnstone Maclay
107
In Royal Bank of Scotland vs Bannerman Johnstone Maclay, what was the court's decision?
The court held there was nothing to stop auditors from disclaiming liability to third parties who relied on the accounts
108
What 5 items in the FS does the auditor opine on?
Income Statement
Balance Sheet
Statement of changes in equity
Statement of cash flows
Notes
109
What 2 things does the auditor opine on for compliance?
Companies Act 2006
Accounting standards
110
What does true & fair mean?
There's no statutory definition
Does NOT mean 100% correct
Common practice/good faith
111
What are the 4 points of the 1983 legal opinion regarding true & fair?
Within acceptable limits
Not misleading
Cost effectiveness considered
non-compliance = not true and fair
112
After making a true & fair decision, what must you be able to do?
Support your conclusion
113
What are some areas of judgement?
Depreciation of computer equipment
Accruals (e.g. electricity)
Bad debt provision
More than one true and fair view can exist
114
According to ISA 240, what is the distinguishing factor between fraud and error?
Whether the underlying action that results in misstatement of FS is intentional or unintentional
115
What are 10 examples of fraud?
IM WOLF, BARK
Intentional misapplication of accounting policies
Misappropriation of assets
Wilful misrepresentations of transactions or of the entity’s state of affairs
Omission or suppression of the effects of transactions from records or documents
Laundering
Falsification of non-financial information
Bribery
Alteration of accounting records or other documents
Recording of transactions without substance
Kickbacks
116
On the fraud triangle, what are the 3 sides?
Opportunity
Incentive/Pressure
Rationalisation
117
Whose responsibility is it to prevent fraud and error?
NOT the auditors'
Rather, the directors'
118
What is an example of a control to prevent / detect fraud?
A whistleblowing hotline
119
What two things are the auditor's responsibility in fraud?
Assess risk and consider changing the nature, timing and extent of procedures
Audit procedures should have a reasonable expectation of detecting material misstatements
120
What 7 factors help auditors detect fraud?
PCB JOII
Pay particular attention to the quality of internal evidence generated by the company
Competent staff
Be alert during audit
Journal entries testing
Obtain sufficient reliable audit evidence from third parties or generated by the auditor
Internal controls
Inquiries with management
121
In detecting fraud, what 4 things must you be alert to?
'Be alert' is the B in PCB JOII
Control overrides
Unusual transactions (nature/size)
Insubstantial/vague answers to audit
Unusual accounting judgements
122
When fraud is found, what three steps are necessary?
Understand nature and circumstances
Evaluate effect on financial statements
Consider implications in relation to other aspects of audit (reliability of management?)
123
When fraud is found, how does it effect financial statements?
Affects true an fair view
Penalties/fines/damages to be paid
Disclosure in FS
Breach of legislation - various negative outcomes
124
When reporting fraud to management, should you only report material fraud?
No, report both material and immaterial
125
When reporting fraud to management, who should you report fraud to?
Management
Board of directors
Audit Committee
126
When reporting fraud to third parties, what is important to consider?
Confidentiality
127
What two things does UK legislation include as money laundering?
All forms of handling criminal property
Facilitating handling of criminal property
128
Which UK legislations relate to money laundering?
Proceeds of Crime Act 2002
Serious Organised Crime and Police Act 2005
Money Laundering Regulations 2007
129
What are the auditor's responsibilities regarding money laundering?
Appoint a Money Laundering Reporting Officer (MLRO)
Train staff to be aware of ML
Verify identity of new clients and keep evidence of identity
Report suspected ML to Serious Organised Crime Agency (SOCA)
130
Regarding the auditor's responsibilities regarding money laundering - what should the training of staff include?
Awareness of ML legislation
How to recognise/deal with suspected ML
How to report it to MLRO
How to identify high risk clients
131
Is there a minimum amount of money when it comes to money laundering?
De minimum - no minimum
132
What are the possible consequences of money laundering?
Non-compliance penalty fines and/or up to 5 years imprisonment
133
How does the changing world of technology impact us?
Way business is conducted changing
Technology constantly developing
Fraud risk increasing
Is the company addressing these risks
134
Are forensic audits strictly voluntary?
Yes
They're in addition to statutory audit
135
What are forensic audits for?
Specifically to look for fraud or the potential for fraud to occur
136
Director's or Auditor's responsibility:
Preventing and detecting fraud per CA 2006
Director's
137
Director's or Auditor's responsibility:
Design and testing of internal controls
Director's
138
Director's or Auditor's responsibility:
Accurate accounting records
Director's
139
Director's or Auditor's responsibility:
Assessing fraud risk
Auditor's
140
Director's or Auditor's responsibility:
Safeguarding assets
Director's
141
Director's or Auditor's responsibility:
Design and implement audit tests in relation to risk
Auditor's
142
Director's or Auditor's responsibility:
Consider reporting requirements – is there a public interest. Should always seek legal advice.
Auditor's
143
Director's or Auditor's responsibility:
Tone at the top
Director's
144
Director's or Auditor's responsibility:
Money laundering regulations to comply with
Auditor's
145
Director's or Auditor's responsibility:
Whistleblowing function
Director's
146
Director's or Auditor's responsibility:
Professional scepticism
Auditor's
147
What is audit risk?
The risk that an inappropriate opinion is issued when the FS are materially misstated
148
What are 6 potential consequences of audit risk?
Lack of confidence
Loss of clients
Loss of fees
Investigation
Lawsuits
Loss of licence
149
What 3 factors make up audit risk?
Inherent risk
Control risk
Detection risk
150
What is inherent risk?
The chances of an assertion about a tx, balance or disclosure being a material misstatement, or being part of a material misstatement, before any controls [ISA 315]
151
Is inherent risk qualitative or quantitative?
Both!
152
What 5 parts make up the inherent risk?
Complexity
Subjectivity
Change
Uncertainty
Susceptibility to misstatement
153
Where does inherent risk come from?
Business risk
Financial statement account risk
154
Who controls inherent risk?
Management
155
What is control risk?
A risk that a material misstatement occurs which will not be detected or corrected on a timely basis by internal controls [ISA 315]
156
Who is in charge of control risk?
Management
157
Where does control risk come from?
Operation of controls
Design of controls
Existence of controls
158
What does RMM stand for?
Risk of Material Misstatement
159
Who controls RMM?
Management
160
What 2 parts make up RMM?
Inherent risk
Control risk
161
How is RMM usually scored?
Aggregated and set as either:
high
moderate
low
162
What is detection risk?
The risk that procedures performed by auditors to reduce audit risk won't detect a misstatement that exists
163
Who controls detection risk?
The auditor
164
What helps decide detection risk?
RMM
165
Where does detection risk come from?
Sampling risk
Non-sampling risk
166
What is the score for inherent risk if there is pressure on income and a reputation for errors?
High
167
What the score for control risk if internal controls are poor?
High
168
If both inherent and control risks score as high, what will the detection risk be set as?
Low
169
If both inherent and control risks score as low, what will the detection risk be set as?
High
170
What is a material misstatement?
If omitting, misstating or obscuring it could influence the decisions of the primary users of FS made on the basis of those FS
171
What does material mean?
Serious
172
What does misstatement mean?
Error
173
What does material misstatement mean?
Serious error
174
Is this material?
$500k error in revenue. Total revenue is $125b.
No, it's insignificant compared to the total
175
What must be considered when deciding materiality or misstatements?
The size and nature of them
176
If an immaterial misstatement existed, could the FS still be used to make financial decisions without an effect on decisions made?
Yes
177
What are the typical guidelines for materiality?
0.5-1% of revenue
5-10% of profits before tax
1-2% of total assets
4-5% of net assets
178
How do you decide which materiality guideline to use?
You must select a measure using your judgement
179
In materiality calculations, how is auditor judgement required?
Adjust as necessary
Lower materiality = more thorough audit
Consider users of FS
Consider knowledge of company
Justify method
Strip out anything extraordinary
180
What are the 4 steps in calculating materiality?
1. Choose guideline appropriate for company
2. Consider the risk profit of the company to determine % used from the guideline
3. Consider whether there are any exceptional items
4. Complete calculation
181
How can omission or misstatement influence the decisions of users of FS?
Fraud
Disclosure omissions
Unclear or inaccurate presentation
182
What are examples of fraud or unclear/inaccurate disclosures?
Non-compliance with accounting standards or CA 2006
Misleading wording
Misstatement affects compliance with regulatory environment
Misstatement affects compliance with debt covenant
183
What conditions always make something material?
Significantly changes profile
Changes profit to loss
Insufficient funds for dividend
Changes to insolvent company
Changes a key ratio
184
You're on slide 16 of Materiality which is second ppt in Topic 7
