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Flashcards in Lecture 1 Deck (26):
1

What is an audit?

Independent third party investigating and examining a company's financial records to form an opinion as to whether they are true and fair

2

Features of audit engagement

Responsible party (Management/ Directors)
PREPARE
Subject matter (Company's performance)
PRESENTED AS
Subject matter information (Financial Statements)
ISSUED TO
User (shareholders)

3

Purpose of an audit

To reduce (not eliminate) risk

4

Reasonable assurance =

Results in positive form of expression of opinion. No material misstatements. Year end audit opinion.

5

Limited assurance =

Negative form of expression of opinion. We did not detect any material misstatements. Half year end audit opinion.

6

Objective of an audit

Enables auditor to express opinion on whether FSs prepared in all material aspects in accordance with the applicable financial reporting framework.

7

Who needs audit?

Companies Act determines. All companies (including subs) unless small/ dormant

8

Small company after 1/1/16 (2 of 3 criteria for 2 consecutive years)

Turnover =

9

Small company before 1/1/16 (2 of 3 criteria for 2 consecutive years)

Turnover =

10

Inverted L test

Yr 1 Yr 2
Current size M S
Status for year M M

11

New audit exemption rules for subsids YE after

1/10/2012

12

New audit exemption rules for subsids (6)

Subsids don't need audit report if parent agrees to guarantee liabilities and meets criteria:
- Parent established under law EEA state
- Shareholders' unanimous agreement
- Subsid included consolidated accounts parent
- Disclose in notes accounts
- File docs at Companies House
- Company not quoted

13

Public company appointing auditor

Appointed by shareholders at AGM/ accounts meeting. Must be appointed/ reappointed each year.

14

If directors/ shareholders fail to appoint auditor in public company

Secretary of state has power to

15

Directors can only appoint auditors (3)

- To fill casual vacancy
- In company's first period for appointing auditors
- Following period when company was audit exempt

16

Private company appointing auditor

Same as public, although AGM unlikely therefore appointed/ reappointed within 28 days of copy of prior year accounts being sent to shareholders

17

New audit report format

ISA 701 for periods ending on/ after 15th December 2016.

18

Expectation gap =

Gap between expectations of users of financial statements and audit firm's legal responsibilities

19

Narrowing expectation gap: (4)

- Audit reports include link to FRS website detailing scope of audit
- All FSs include Director's responsibility statement
- Engagement letter includes Director's responsibility statement
- Recommendation for audit committees to be established

20

External regulators (2)

- FRC (Financial Reporting Council)
- Accountancy Bodies (ICAEW, ICAS, ACCA)

21

FRC roles (2)

- Sets standards and rules
- Polices application of standards

22

4 stages to an audit

1) Planning and design approach
2) Controls testing
3) Substantive testing
4) Completion

23

Plan and design approach (5)

- Client acceptance, independence checks and issue engagement letter
- Understanding client's business and industry
- Assess business risk, signif risk and inherent risk
- Planning analytics/ materiality
- Understanding entity and process level control environment

24

Controls testing

Perform tests of process level and entity level controls (if relying on)

25

Substantive testing (3)

- Perform ToD and SAPs
- Perform additional procedures if testing didn't provide sufficient comfort
- Perform testing on going concern

26

Completion (5)

- Perform tests for financial statement disclosures
- Issue audit report
- Communicate findings to management and audit committee
- Accumulate final evidence
- Complete assembly of audit file