Key Facts Flashcards
(156 cards)
1
Q
How long should a private limited company keep its accounting records for?
A
3 years
2
Q
How long should public limited companies keep their accounting records?
A
Six years from the date of preparation
3
Q
Where should accounting records be kept?
A
At it’s registered office or another place where the directors seem fit - and must be open at all times to be open for inspection.
4
Q
What is assurance?
A
A degree of confidence
5
Q
How to qualify for the audit exemption?
A
Meet at least 2 of the following at least two of the following requirements for 2 consecutive years:
- turnover of not more than £10.2mil
- balance sheet total of not more than £5.1mil
- not more than 50 employees
6
Q
When can the audit exemption not be claimed:
A
A public, listed or limited company
A bank or insurance company
A company that is part of a group of companies that are public companies, banks or insurance companies
7
Q
What about exemptions for dormant companies?
A
They are exempt if no transactions recorded in the last accounting period: provided they: are not a bank or insurance company, or not required to produce group accounts, and they fulfill at least 2 of the 3 criteria.
8
Q
What are the benefits gained from assurance?
A
Independent qualified accountant reviewing the business
Satisfies external stakeholders
Can act as a deterrent against threat of fraud
Business may grow past exemption limits in future so an audit prior to this can help process run smoothly.
9
Q
Which ISA covers the basics of audit?
A
ISA 200 - overall objectives of the independent auditor and the conduct of an audit in accordance with international standards on auditing.
10
Q
What are the overall objectives of the auditor?
A
Obtain reasonable assurance that the financial statements are free from material misstatements
Report on the financial statements and communicate as required by the ISAs
11
Q
What does GAAP stand for?
A
Generally accepted accounting principles.
12
Q
Who are the FRC?
A
Financial reporting council - they’re the independent regulator of auditing and accounting in the UK.
13
Q
What is indicative of a good control environment?
A
Directors communicate and enforce integrity
Directors and staff are committed to competence
Directors participate in control activities.
HR policies
Authorities and responsibilities delegated out to staff
14
Q
What are examples of information systems?
A
A filing cabinet
An integrated IT system
15
Q
What are general IT controls?
A
Policies and procedures relating to applications supporting the effective functioning of application controls.
16
Q
Examples of general IT controls?
A
Data centre and networks
Access security
Program change
Systems software change
17
Q
What are control activities?
A
Policies and procedures that help to ensure that management directives are carried out.
18
Q
What are performance reviews of balances?
A
Comparing budgets to actual performance (making sure it was done correctly)
19
Q
What is information processing?
A
Checking that transactions have been processed accurately, completely and have been authorised.
20
Q
What are physical controls?
A
Controls over the physical security of assets
21
Q
Examples of control activities?
A
Authorisation of documents Controls over computerised applications Controls over arithmetrical accuracy Maintaining control accounts and trial balances Reconciliations Comparing assets to records Restricting access (physical control)
22
Q
What is a control objective?
A
What the system is trying to do
23
Q
What is a risk?
A
What a system is trying to avoid
24
Q
What is a control procedure?
A
HOW a system achieves objectives and manages risks
25
What are the major accounting systems?
```
Purchase
Revenue
Payroll
Inventory
Non current assets
Cash and bank
```
26
What are the 4 procedures for understanding systems?
Ascertaining the accounting system
Documenting the accounting system
Confirming the accounting system
Evaluating the accounting system
27
What are the 3 potential methods for documenting the processes of accounting systems?
Narrative notes
Internal control checklists (ICCs) or internal control questionnaire (ICQs)
Flowcharts
28
What are narrative notes best suited to?
Simple tasks
29
When should flow charts be used?
For more complex systems.
30
When should ICCs or ICQs be used?
To check off items that may be important and identifying deficiencies.
31
Rules of flowcharts?
Conformity of symbols ( each symbol represents one thing)
Key of symbols used.
Chart should flow top to bottom and left to right.
Lines should only connect where necessary.
32
Advantages and disadvantages of narrative notes?
Adv
Quick to prepare
Disadvantage
Confusing for complex systems
33
Advantage / disadvantages of flowcharts
Adv - easier for larger systems
Disadvantages - need experience to prepare
34
Advantages/ Disadvantages of questionnaires
Adv - Easy to delegate to junior staff
Disadvantages- client may overstate controls
35
How to confirm the system?
Walkthoughs
36
How to evaluate controls?
Presence / absence of internal controls and their impacts.
Test the system
37
If auditor believes controls are effective - what approach for rest of the audit?
Test using tests of control and take combined approach to audit, testing both controls and balances
38
If auditor believes controls are ineffective? What approach?
No test of controls - just substantive testing ONLY test substantively NO Controls
39
What are the verification techniques?
```
Analytical procedures
Enquiry and external confirmation
Inspection
Observation
Recalculation or reperformance
```
40
What’s the mnemonic for verification techniques?
AEEIOUR
41
What are examples of analytical procedures?
Comparisons of actual with budget
Calculation of ratios
Credibility checks (proof)
42
Why are analytical procedures completed as part of the risk assessment?
To identify risk areas
Determine nature, timing and extent of procedures.
43
What should the auditor consider when deciding whether to use analytical procedures as substantive procedures?
Are the procedures suitable to obtain evidence about the relevant assertions?
Is the data the auditor is using reliable, available and relevant?
44
What are tests of control used for?
To obtain evidence about the effective operation of the accounting and internal controls systems.
45
Which verification techniques can be used to test controls?
```
Enquiry
Inspection
Observation
Recalculation
Reperformance
```
46
What is substantive testing?
Audit procedures designed to detect material misstatement and included test of details and analytical procedures.
47
If we think the controls are effective - do we do more or less substantive testing?
Less
48
If we place little or no assurance on controls - do we increase or decrease the level of substantive testing?
Increase
49
Mnemonic for for substantive testing methods?
AEIOU
50
Summary of IAS 520?
The objectives of the auditor are to obtain relevant and reliable audit evidence when using substantive analytical procedures
51
What is sufficiency of evidence?
Enough of it
52
What is appropriateness of evidence?
The right kind of evidence
53
Some generalisations about reliability of audit evidence?
More reliable when from independent sources
If internally generated - more reliable if strong controls.
More reliable when in documentary form.
More reliable when documents are originals.
54
What are the assertions about classes of transactions and events and related disclosures?
```
Occurrence
Completeness
Accuracy
Cut-Off
Classification
```
55
What are the assertions about account balances and related disclosures at period end?
```
Existence
Rights and Obligations
Completeness
Accuracy, valuation and allocation
Classification
Presentation
```
56
How to test for understatement in financial statements??
LIABILITIES like trade payables
Start the test from the source document and agree the source document to the financial records.
57
How to test for overstatement in financial statements?
Non-Current Assets or Sales Revenue
| Start with financial records and trace back to source documents - checking existence!
58
What is CAATs?
Computer assisted audit techniques carried out by the auditor using a computer.
Could be Simple procedures like spreadsheets or more complex like embedded audit facilities.
59
Benefits of CAATs
Large volumes of data can be analysed at great speed = more efficient audit.
60
Drawbacks of using CAATs?
Required high quality data
Needs client permission
Skills and experience are required to both administer and interpret the findings.
61
What tests may audit software complete?
Reperformance of calculations
Extraction of samples
Analytical review
62
What is test data?
Submission of dummy data into the clients system to ensure it’s processed correctly, or not processed if deliberately false.
63
What does SCARF do?
| Systems control and review file
Extends the test of control and produces a diagnostic report of how the system is working.
64
What does ITF do?
| Integrated test facilities
Virtual copy of the system used for testing purposes and extends the test of control
65
What is audit sampling?
Applying audit procedures to less than 100% of items within an account balance or class of transactions to draw conclusions from the population as a whole.
66
What is statistical sampling?
An approach to sampling which involves random selection of the sample items , the use of probability theory to evaluate sample results and measure sampling risk.
67
What is the key rule of audit sampling?
All sampling units must have an equal chance of being selected for testing.
68
What does sampling always carry?
A detection risk - that misstatements may not be detected.
Larger sample = lower detection risk
69
What is non statistical sampling? And an example?
Auditors will exercise judgement to select a sample, auditors already test individually material items, so these may be selected.
If cut off is an issue, auditor may focus on transactions just before and just after the year end.
70
What is stratification?
Dividing a population into smaller sub-populations, each of which is a group of sampling units, usually by value.
Eg instead of testing receivables as a whole, split into material and immaterial and then sample the immaterial (all material should be tested)z
71
Where would you test 100% of the population?
Additions in PPE.
| Usually only 1 or 2 so just test all
72
What is random selection?
Auditor uses a computer programme or table to mathematically randomly select the sample.
73
What is systematic selection?
Randomly selects the first and then selects every 10th transaction after that (interval sampling).
74
What is money unit sampling?
Value weighted selection, every nth £ is selected rather than every nth recievable (interval sampling)
75
What is block selection?
Selecting a block of continuous items - eg choosing one month out of the year to sample.
RARELY USED DUE TO POOR REPRESENTATION OF THE POPULATION AS A WHOLE
76
What is the tolerable misstatement for tests of control?
Maximum rate of deviation from a control that auditors are willing to accept and still conclude effectiveness.
77
What is tolerable misstatement for tests of detail?
The maximum monetary error in an account or class of transactions that an auditor is willing to accept and still conclude that the statements are true and fair.
78
How to lower detection risk?
Increase the size of the sample
79
For TOC - how would an increase in extent to which auditor intends to rely on controls effect sample size?
Increase in tests of control
80
For TOC - how would an increase in the tolerable rate of deviation affect sample size?
Decrease in TOC
81
For TOC - how would an increase in the expected rate of deviation effect sample size?
Increase - expect errors? Test more
82
For TOC - how would an increase int he desired level of assurance affect sample size?
Increase sample size for TOC
83
For TOC - how would increasing the sample size Effext the sample size?
Negligible effect.
84
For TOD - how would an increase in RoMM effect sample size?
Increase
85
for TOD - how would an increase in the use of other procedures at the same assertion affect sample size?
Decrease
86
For TOD - how would an increase in the desired level of assurance affect sample size?
Increase - need to test more
87
For TOD - how would an increase in the tolerable level of misstatement effect sample size?
Decrease
88
For TOD - how would an increase in expected misstatement affect sample size?
Increase
89
How would stratification of the population impact sample size?
Decrease
90
What is a risk at financial statement level?
Possibility that certain factors may have a detrimental effect on whole set of financial statements. Eg flaws in control system or adverse economic conditions
91
What is a risk at assertion level?
One specific element of the financial statements that’s at risk of Material Misstatement due to problems with one or more characteristics.
Eg incorrectly valued material assets
92
According to ISA 315 - what circumstances should be considered during risk assessment?
```
Changes in operating environment
New personnel
New or revamped systems
Rapid growth
New tech
New business model
Restructuring
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93
What is audit risk?
The risk that the auditor does not detect one or more risks that relate to an audit.
94
What is inherent risk?
Always present - client areas that are prone to fraud / error.
95
What is control risk?
Risk only present at clients, representing the risk that the controls not preventing or detecting fraud.
96
What is detection risk?
Risk that audit procedures will not detect a misstatement.
97
What is the audit risk formula?
Audit risk = inherent risk x control risk x detection risk
98
What is sampling risk?
Risk that the sample selected does not adequately represent the population.
99
What is non sampling risk?
Occurs from poor interpretation and leads to the wrong conclusions being made.
100
What are assets more likely to be under or over stated?
Overstated
101
Are liabilities more likely to be under or over stated?
Understated
102
What is a material item?
If either the omission or misstatement of an item could reasonably affect the economic decisions to the users of the financial statements.
103
What % of profit after tax should be considered material?
5%-10%
104
What % of revenue is calculated as material?
1% to 2%
105
What % of total assets should be deemed material?
2-5%
106
What is always material?
ANY matter relating to directors
107
What is performance materiality?
Amount set by auditor at less than materiality. Reduces to an appropriately low level that aggregate of uncorrected mistatements exceeds total materiality
108
What should be documented on file in terms of materiality?
Materiality for FS as a whole
Material levels for popular classes of transactions, account balances or disclosures
Performance materiality
Any revision of materiality of any kind.
109
What does material and pervasive mean?
Not confined to specific elements of the financial statements
If so confined, represent or could represent a substantial proportion of the financial statements
If disclosures are fundamental to users understanding of financial statements
110
What are the relevant assertions for assets and liabilities?
```
Existence.
Completeness
Rights and obligations
Valuation
Disclosure
```
111
What is it important to review with non current assets?
That only capital expenditure is included in the SOFP.
112
What are audit risks with leases?
May not be a ROU asset
May be incorrect in FA
113
How are operating leases accounted for?
Lease payments recognised as expense in SPL and OCI on a straight line basis over the lease term.
114
What are the 3 main tests of inventory to look out for?
Quantity
Valuation
Disclosure
115
What test gives evidence for completeness, rights and obligations and existence for inventory?
Attending the physical inventory count.
116
3 methods for inventory count?
Year end full count
Interim with follow through to year end
Continuous records and perpetual inventory.
117
What should raw materials be valued at?
Cost
118
What is cost for WIP?
Cost plus cost of purchase plus costs of conversion
119
How might an auditor test costs of WIP?
Recalculate the cost of conversion or perform analytical procedures by comparing similar inventory lines across years.
120
What should cut off testing show?
That income and expense is recorded at the point where risks and rewards of ownership are transferred
121
How to cut off test revenue?
Obtain last GDN number at year end
Select sample of some from just before year end and some just after year end and ensure GDN / sales invoices is accounted for in correct period
122
How to cut off test purchases?
Obtain last GRN note at year end
Select sample of GRN and Purchases invoices and check they’re the same and that accounted for in correct period.
123
What is circularisation?
Writing directly to customers asking them to confirm the balance that they think they owe to the client.
124
What are standard audit tests for recievables for completeness/existence?
Obtain listing of trade recievables and reconcile to nominal ledger.
Check details of despatches near year end and check accounted for in correct period.
Check that sales invoice has been raised for all despatches in year.
Review any after date credit notes issued.
125
How to test for rights and obligations within trade receivables?
Trace a sample of TR to cash received post year end.
Discuss with management / review board minutes to establish whether any TR have been factored.
126
How to test valuation within TR?
Review consistency of policy and it’s appropriateness.
Discuss significant overdue debts with company official using TR Aged Analysis.
Review relevant correspondence.
Ensure all debts written off where properly authorised.
Review allocation of after date cash received.
127
How to test disclosure within TR?
Ensure trade receivables are appropriately categorised within current assets.
Ensure classification is correct per companies act 2006
128
How to test cash and bank as part of an audit?
Review of bank reconciliations to understand the timing differences between entity cash book and banks understanding of entity’s bank balance.
129
How to perform bank rec?
Agree cash book reconciliation to cash book.
Agree documented bank statements value to actual bank statement.
Request any extra account info in bank letter.
Trace I presented cheques and outstanding lodgements.
130
Other tests for cash and bank other than bank reconciliations for completeness/existence?
Completeness/Existence - obtain listing on bank and cash and reconcile to ledger.
Review bank confirmations for account details.
Count petty cash balance.
Review cashbook for unusual items.
131
How to test bank and cash for rights and obligations?
Review bank letter to confirm valid title to accounts is held.
132
How to test bank and cash for disclosure?
Review bank letter for any legal right to set off
Investigate whether any accounts are secured over assets of the company.
133
What core information should be requested in the standard letter?
Bank accounts held and their balances
Details of set off arrangements
Loans, overdrafts, any covenants, guarantees and indemnities
Other banks or branches that customer has dealt with in last financial period.
134
What assertions are auditors looking for in non current liabilities (borrowings?)
Completeness
Valuation
Disclosure
135
How to test for completeness in borrowings?
Obtain a schedule of loans outstanding at the end of accounting period.
Compare opening balances for CY with closing balances for PY.
Test clerical accuracy of schedule.
Compare balances to GL.
Check names of lenders to relevant info eg board minutes.
136
How to test for valuation in borrowings?
Trade additions and repayments to cash book.
Confirm repayments are in line with the loan agreement.
Examine receipts for loan repayments.
Verify interest charged for the period.
137
How to test disclosure in borrowings?
Review disclosures made in financial statements and ensure they meet legal requirements.
138
How do auditors test accounting estimates?
Review and test the process completed by management
Use an independent estimate / value
Review of subsequent events
139
How is revenue often tested?
Using analytical procedures with key assertions being completeness and accuracy.
140
How is revenue tested for completeness?
Review the level of revenue over the year, comparing month by month with the previous year.
Consider the affect of price increases
Consider the level of goods returned, sales allowances and discounts.
May follow transaction through from order, to dispatch note, to sales invoice to sales day book to sales ledger to general ledger.
141
How to test revenue for accuracy?
Can check that revenue is measured correctly by:
Checking calculations and additions on sales invoices.
Ensuring VAT has been dealt with appropriately
Checking discounts
Checking casting of sales ledger account and control account
142
Obvious tests for payroll?
Substantive procedures on payroll expense and analytical procedures as there are many predictable relationships.
143
How to test for occurrence in payroll?
Check individual remuneration per payroll to personnel records.
Confirm existence of employees by meeting them.
Check benefits to supporting documentation.
144
How to test for accuracy in payroll?
Recalculate benefits
Check deductions of tax and NI are correct.
Check validity of other deductions
145
How to check for completeness in payroll?
Check a sample from records to the payroll.
Check whether joiners paid in correct month.
Check casts of payroll.
Confirm payment of pay to bank statements
Agree net pay per cash book to payroll.
Scrutinise payroll and investigate unusual items.
146
How to test purchase for occurrence?
Consider level of purchase month by month compared with prior years
Consider effect on value of purchases on price changes
Compare ratio of trade payables to purchases for PYs
Compare ratio of trade payables to inventory with PYs
Consider level of major expenses other than purchase with PYs
147
How to test other payables (accruals):
Verify the valuation, existence, and completeness by reference to subsequent payments.
Verify calculations for reasonableness in light of all supporting evidence.
Perform analytical procedures to assess if additional payables are required.
Review payments and invoices received after year end to ascertain I’d they should have been accrued.
148
How to test other receivables (prepayments)?
Trade payments to both cashbook and invoice to test for existence.
Review calculation of the payment for accuracy.
Review SPL to ensure all likely prepayments have been accounted for.
Perform analytical procedures to assess if they seek reasonable.
149
What is included in the independent auditors report?
Opinion
Basis of opinion
Material uncertainty relating to going concern
Key audit matters
Other information
Responsibility of management and those charged with governance for the financial statements
Auditors responsibilities for the audit of the financial statements.
Report on legal and regulatory requirements
Signed by…
150
What may an emphasis of matter paragraph be used for?
Significant uncertainties
A significant subsequent event between FS and auditor report
Early applications of new accounting standard.
Major catastrophe that has had / continues to have significant effect on financial position of company.
151
Is the emphasis of matter an auditors modified opinion?
No - the paragraph can only occur if all events mentioned were adequately treated in the financial statements.
152
What are the 3 types of modified audit opinion?
A qualified opinion
An adverse opinion
Disclaimer of opinion
153
If the financial statements are materially misstated but not pervasive what opinion is given?
Qualified opinion
154
If unable to obtain sufficient appropriate audit evidence but not material and pervasive?
Qualified opinion
155
If the financial statements are materially misstated and pervasive what opinion?
Adverse opinion - the FS do not give a true and fair view
156
If unable to obtain sufficient appropriate audit evidence and material and pervasive?
Disclaimer of opinion (we do not express an opinion)
