Performing, completing and reporting on an audit engagment

Question 1

Audit evidence exam approach

Answer 1

Verb
What
Why
How
The auditor Xs Y in order to ensure Z, which is proved by…

Question 2

Specialised entities

Answer 2

May be subject to extra regulations / professional rules / special auditing guidance
Auditors must assess the particular risks which will cause differences in the audit approach

Question 3

Use of the work of others

Answer 3

External auditor maintains sole responsibility for the opinion expressed
An effective internal audit function may reduce, modify or alter the timing of external audit procedures but it can never eliminate them entirely
Auditor must assess the objectivity, competence and approach of the internal audit

Question 4

Using the work of an expert

Answer 4

Auditor’s expert - Used by the auditor to assist in obtaining audit evidence
Management’s expert - Used by the firm to assist in preparing the financial statements

Question 5

Factors influencing the auditor’s decision to use an auditor’s expert when management has used a management expert

Answer 5

Scope and objectives of management’s expert’s work
Extent of management’s control or influence over the work of the management’s expert
The management’s expert’s competence

Question 6

Factors an auditor should consider before relying on an auditor’s expert

Answer 6

Competence
Capabilities
Objectivity

Question 7

Group auditor responsibilities

Answer 7

Conducting the group audit in accordance with ISQM 1 and ISA 220
The audit opinion on the group financial statements

Question 8

When relying on a Component auditor, the Group auditor must understand the Component auditor’s…

Answer 8

Understanding of the ethics relevant to the group audit
Competence
Time pressure
Regulatory environment

Question 9

If the component is assessed as low materiality and risk…

Answer 9

Group auditor sends a questionnaire to the Component auditor
- details approach, opinion on internal controls and modifications identified

Question 10

If the component is assessed as high materiality and risk…

Answer 10

Group auditor determines who does the work
- If performed by Component auditor, Group auditor reviews the working papers

Question 11

Auditor approach to estimates in the financial statements

Answer 11

Obtain sufficient and appropriate audit evidence to ensure estimates are reasonable
Consider the risk of material misstatement from inherent risks of the amount being estimated / control risks relating to the creation of the estimate

Question 12

Management’s Point Estimate

Answer 12

Amounts recognised by management as an estimate in the financial statements

Question 13

Auditor’s Point Estimate

Answer 13

Amounts developed by the auditor for assessing management’s point estimate

Question 14

Estimation Uncertainty

Answer 14

Susceptibility of an estimate to error due to lack of precision

Question 15

Audit approaches

Answer 15

Test controls
Consider subsequent events / historical accuracy / compliance with the relevant accounting standard
Be sceptical
Verify data used by management
Management’s expert
Create an auditor’s point estimate
Ensure related disclosures are adequate
Include written representation letter

Question 16

Completion phase

Answer 16

Review the file
Decide on the final issues demanding professional judgement
Sign off the accounts

Question 17

Considerations for the partner during the completion stage

Answer 17

Do the financial statements comply with the Companies Act 2006
Do the financial statements make sense
Consideration of the work done
- in line with the audit plan?
- right work done?
- enough work done?
- any issues arising have been resolved?

Question 18

Auditor responsibilities during the completion phase

Answer 18

Evaluate discovered errors
Ensure opening balance and comparatives are correct
Review the going concern basis of the financial statements / subsequent events
Obtain necessary management representations

Question 19

Auditor’s report when a company is not going concern but going concern basis used to prepare the financial statements / lack of disclosure

Answer 19

Pervasive Misstatement
Adverse opinion

Question 20

Auditor’s report when a company is not going concern but there is inadequate disclosure

Answer 20

Material misstatement
Qualified opinion

Question 21

Auditor’s report when a company is not going concern and there is full adequate disclosure

Answer 21

True and fair
Emphasis of matter paragraph used to highlight director’s disclosure note explaining the situation

Question 22

Auditor’s report when there are significant uncertainties relating to the company’s going concern where evidence cannot be expected to reasonably exist

Answer 22

True and fair
‘Material uncertainty related to going concern’ note used explaining the issue

Question 23

Adjusting events

Answer 23

Provide evidence of conditions that existed at the date of the financial statements
Financial statements should be adjusted and adequate disclosures made
eg resolution of a court case / bankruptcy of customer prior to the year end

Question 24

Non-adjusting events

Answer 24

Provide evidence of conditions that arose after the date of the financial statements
Only adequate disclosure is required
eg. destruction of major asset by flood or fire / major share transactions

Question 25

Why is the auditor required to obtain certain written representations from management?

Answer 25

Knowledge of the facts is confined to management or the matter is one of management judgement

Question 26

Within the written representation, management must confirm…

Answer 26

Their responsibility to prepare the financial statements
They have provided all relevant information to the auditor
All transactions are recorded in the financial statements

Question 27

Written representations

Answer 27

Signed by the directors before the auditors sign the auditor’s report
Supports audit evidence if it is not sufficient and appropriate in its own right

Question 28

Audit outputs

Answer 28

Auditor’s report for the shareholders
Communication to those charged with governance (management letter)

Question 29

Matters to be communicated prior to the audit commencing (ISA 260)

Answer 29

Auditor’s responsibilities
Auditor declared independence and safeguards

Question 30

Significant findings from the audit to be communicated (ISA 260)

Answer 30

Written representations the auditor is requesting
The auditor’s views about significant qualitative aspects of the entity’s accounting practices - accounting policies / estimates / financial statement disclosures
Significant difficulties encountered / matters discussed with management

Question 31

Communicating deficiencies in internal control

Answer 31

Auditor shall determine whether deficiencies are significant
Significant deficiencies communicated in writing to those charged with governance
Written communication includes a description of deficiencies and their potential effects

Question 32

Factors the auditor will consider in determining whether deficiencies are significant

Answer 32

Likelihood of the deficiencies leading to material misstatement
Susceptibility to loss or fraud
Volume of activity exposed to the deficiency
Frequency of the deficiency

Question 33

Auditor’s reports

Answer 33

Standardised - degree of consistency / enhances understandability
Unmodified opinion - auditor satisfied that the evidence obtained is sufficient and appropriate
Modified opinion - auditor not satisfied with the sufficiency or appropriateness of the evidence / has issues with the content of the financial statements

Question 34

Components of an auditor’s report

Answer 34

Title
Addressee
Auditor’s opinion
Basis for opinion
Conclusions relating to going concern / Material uncertainties facing the company
Emphasis of matter
Application of materiality
Approach - key audit matters
Other information
Opinion on other matters required by the Companies Act
Matters on which the auditor is required to report on by exception
Responsibilities of directors
Auditor’s responsibilities

Question 35

Material but not pervasive
Unable to obtain sufficient and appropriate evidence / Misstatement

Answer 35

Qualified opinion
“Except for … the financial statements do show a true and fair view”

Question 36

Material and pervasive
Misstatement

Answer 36

Adverse opinion
“The financial statements do not show a true and fair view due to…”

Question 37

Material and pervasive
Unable to obtain sufficient and appropriate evidence

Answer 37

Disclaimer opinion
“We are unable to express an opinion as to whether the financial statements show a true and fair view due to…”

Question 38

Exam method for auditor’s reports

Answer 38

Identify the issue
Conclude and justify whether the misstatement / possible misstatement is material
Conclude and justify whether it is pervasive or not
Conclude on the impact of the audit opinion
Conclude on any further impacts on the auditor’s report

Question 39

‘Emphasis of matter’ paragraph

Answer 39

Added by the auditor where it is considered necessary to draw users’ attention to a matter presented or disclosed adequately in the financial statements that are of such importance that they are fundamental to users’ understanding of the financial statements
Included immediately after the opinion
“Without qualifying our opinion we draw your attention to…”

Question 40

‘Emphasis of matter’ paragraph examples

Answer 40

To emphasise a disclosure note
- that the company is not a going concern
- surrounding unquantifiable litigation facing the company