Process of Assurance: Obtaining an Engagement Flashcards Preview

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Flashcards in Process of Assurance: Obtaining an Engagement Deck (26)
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1
Q

Drew Brothers, chartered accountants, has recently accepted appointment as the auditor of Abysin Ltd. In terms of client due diligence, which two of the following documents should they check?

A. Certificate of Incorporation
B. Passport
C. Utilities bill
D. Annual return

A

<p>Certificate of incorporation and annual return (which should give details of registered office, shareholders and directors).

If taking on any work from individuals at the firm, should obtain information for them from their passports and utilities bills.</p>

2
Q

<p>True/False

An audit firm must not accept an engagement is the client is not previously known to them</p>

A

<p>False

Although, if client is unknown to the audit firm, then they should seek references in respect to key personnel associated with the client and carry out due diligence</p>

3
Q

<p>If a prospective client declines permission for the auditor to contact the previous auditors, what is the recommended action?</p>

A

<p>Decline the engagement</p>

4
Q

<p>For an assurance engagement, how long should client identification documents be held for?</p>

A

<p>For at least five years after the cessation of the relationship with the client</p>

5
Q

<p>True/False

| An engagement letter is only ever sent to a client before the first audit</p>

A

<p>False

It should be reissued if there is a change in circumstances</p>

6
Q

<p>True/False

An engagement letter defines the scope of the engagement</p>

A

<p>True

This is one of the key elements of the engagement letter</p>

7
Q

<p>Which three would ordinarily be contained in the overall audit strategy?

A. The contract between the audit firm and the client
B. The results of the audit risk assessment
C. Calculation of preliminary materiality
D. Detailed plan of audit procedures to be carried out
E. List of staff to be involved with the audit</p>

A

<p>B, C and E

The contract between the audit firm and client would be found in the engagement letter

The detailed plan of audit procedures to be carried out would be found in the audit plan</p>

8
Q

<p>What are the performance ratios?</p>

A
<ol>
	<li>Return on capital employed</li>
	<li>Return on shareholder's funds</li>
	<li>Gross profit margin</li>
	<li>Cost of sales percentage</li>
	<li>Operating cost percentage</li>
	<li>Net margin (Operating margin)</li>
</ol>
9
Q

<p>What is return on capital employed?</p>

A

Profit before interest and tax/equity + net debt

10
Q

What is return on shareholders’ funds?

A

Net profit for the period/share capital + reserves

11
Q

What is gross profit margin?

A

Gross profit/Revenue

12
Q

What is cost of sales percentage?

A

Cost of sales/Revenue

13
Q

What is operating cost percentage?

A

Operating costs/Revenue

14
Q

What is the net margin?

A

Profit before interest and tax/Revenue

15
Q

What are the short-term liquidity ratios?

A

Current ratio and Quick ratio

16
Q

What is the current ratio?

A

Current assets : Current liabilities

17
Q

What is the quick ratio?

Hint: It’s very similar to current ratio, but perhaps more liquid

A

Receivables + Current investments + cash : current liabilities

18
Q

What are the long term solvency ratios?

A

Gearing ratio and Interest cover

19
Q

What is the gearing ratio?

A

Net debt/Equity

Measure of how reliable the entity is on external finance

20
Q

What is interest cover?

Hint: this is the number of times profit before interest can cover interest

A

Profit before interest payable/Interest payable

21
Q

What are the efficiency ratios?

A

Net asset turnover
Inventory turnover
Trade receivables collection period
Trade payables payment period

22
Q

What is net asset turnover?

A

Revenue/Capital employed = Revenue/Equity + net debt

23
Q

What is inventory turnover?

A

Cost of sales/inventory

24
Q

What is trade receivables collection period?

A

Trade receivables/Revenue *365

25
Q

What is trade payables payment period?

A

Trade payables/credit purchases *365

26
Q

What is capital employed?

A

Equity + Net Debt
WHICH IS THE SAME AS
Total assets - Current liabilities