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Workbook Questions Flashcards

1
Q

Define assurance engagement

A

An assurance engagement is one in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation of measurement of a subject matter against criteria

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2
Q

Assurance type: reasonable
Assurance level: ______
Opinion: _______

Assurance type: limited
Assurance level: _____
Opinion: _______

A

Assurance type: reasonable
Assurance level: high
Opinion: positive

Assurance type: limited
Assurance level: moderate
Opinion: negative

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3
Q

Benefits of assurance to users:

  1. Enhances _____ of information being reported on
  2. Reduces risk of ____ bias, error or fraud in information being reported on
  3. Draws attention of the user to any _______ in the information being reported on
A
  1. Credibility
  2. Management
  3. Deficiencies
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4
Q

Benefits of assurance to the wider market:

  1. Ensures _____ information circulated in the market
  2. Gives investors added _____ in the market
  3. Improves _______ of organisations trading in the market
A
  1. Reliable
  2. Faith
  3. Reputation
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5
Q

The objective of an audit of financial statements is to express an opinion as to what?

A

Whether financial statements are prepared in accordance with an applicable financial reporting framework

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6
Q

Audit threshold: exempt from audit of 2 out of 3 applies:

  1. No more than _____ employees
  2. Revenue does not exceed £_____ million
  3. Gross assets do not exceed £______ million
A
  1. 50
  2. 10.2
  3. 5.1
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7
Q

The following companies must have an audit:

  1. Companies involved in the _____ and insurance markets
  2. Companies where shareholders of at at least _____ of the shares request one
  3. Where the company’s ______ of association require an audit
  4. ___-_______ public companies
  5. Any company which is a member of a group including one of the above
A
  1. Banking
  2. 10%
  3. Articles
  4. Non-dormant
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8
Q

Benefits of being audited:

  1. Value in having a business ____ by another set of professional eyes
  2. Provides additional ______ to third parties
  3. A growing _____ will one day require an audit
  4. An audit may have ____ benefits, such as the auditors recommending improvements in systems
A
  1. Scrutinised
  2. Assurance
  3. Business
  4. Subsidiary
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9
Q

_____ evidence is obtained during a review assignment, and the evidence is generally less ______ as some of the most reliable sources are not required

A

Less, reliable

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10
Q

It is the director’s job to manage the business so that its objectives are achieved. This may mean producing ____ returns for shareholders or meeting certain targets. It also means assessing what _____ _____ face the company and devising the necessary strategies to deal with them

A

Suitable, business risks

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11
Q

Per The Company’s Act 2006, it is the directors responsibility to:

  1. _______ assets
  2. Maintain accuracy of company _____ and ______
  3. Prepare and deliver ______ ______
A
  1. Safeguard
  2. Books, records
  3. Financial statements
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12
Q

Following the Enron scandal, the _____-____ Act was passed into US law in 2002.

This Act demands that CEOs and CFOs attest to the ____ of financial statements

Failure to attest to this act can result in ____ penalties

A

Sarbanes-Oxley

Veracity

Criminal

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13
Q

The responsibility of the external provider of assurance is determined by what four factors?

A
  1. The requirements of legislation/regulation
  2. The terms of engagement for the assignment
  3. Ethical and professional standards
  4. Quality control standards
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14
Q

It is the external auditor’s responsibility to:

  1. Form an independent opinion on the ____ and ______ of the accounts
  2. State in their auditor’s report whether in their opinion the information given in the director’s report and strategic report is consistent with the _____ ______
  3. Confirm that the accounts have been properly prepared in accordance with the ______ Act
A
  1. Truth, fairness
  2. Financial statements
  3. Companies Act
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15
Q

In order to verify the truthfulness and fairness of accounts, an external auditor must ensure that

  1. The audit is ____ properly
  2. ______ appropriate audit evidence is gathered
  3. The evidence is properly ____ and ____ conclusions are drawn
A
  1. Planned
  2. Sufficient
  3. Review, valid
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16
Q

An assurance firm may be employed to either:

  1. Assist the company with ____ its accounting records
  2. Assist the company with preparing _____ information
  3. Prepare the _______ statements of the company
  4. Prepare the _____ _____ return of the company

I.e. management ______ overall responsibility

A
  1. Maintaining
  2. Management
  3. Financial
  4. Corporation tax

Retains

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17
Q

The principles and rules concerning the provision of non-audit services by the audit firm to its clients are set out in the what?

A

The FRC’s Ethical Standard for auditors

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18
Q

Sarbanes-Oxley Act has resulted in:

  1. ______ enforcement of auditor independence
  2. A ____ ______ _______ _____ ____ (PCAOB) has been set up to inspect audit files of US listed and other public interest clients
A

Stricter

Public Company Accounting Oversight Boars

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19
Q

ISA ____ “Communicating deficiencies in internal control to those charged with governance and management” sets out that auditors should determine whether audit work has identified any deficiencies in internal control. If these are significant, what should the auditor do?

A

Communicate them in writing on a timely basis

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20
Q

The primary responsibility for the prevention and detection of fraud tests with which two actors?

To fulfil this, they can:

  1. Follow a culture of ____ and _____ behaviour
  2. Establish a sound system of _____ control
  3. Implement ______ and ____ ensuring the orderly and efficient conduct of the company’s business
A
  1. Those charged with governance of the entity
  2. Management
  3. Honesty and ethical
  4. Internal
  5. Policies, procedures
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21
Q

ISA ____ states that the auditor must obtain ______ assurance that the financial statements, taken as a whole, are free from material misstatement

A

240, reasonable

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22
Q

True or false:

Per ISA 240, auditors are entitled to accept representations as truthful and records as genuine, unless there is evidence to the contrary

A

True

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23
Q

If auditors identify misstatements which might indicate that fraud has taken place, they should consider the implications of this for other aspects of the audit, particularly _______ representations which may not be trustworthy if fraud is indicated

A

Management

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24
Q

True or false:

Auditors are required to obtain particular written representations from management acknowledging its responsibility to design and implement internal controls to prevent and detect fraud

A

True

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25
Q

If fraud or error causes the financial statements to not give a true and fair view or there is a fundamental _____, it should be included in the auditor’s report in the usual way, thereby notifying the ______

A

Uncertainty, shareholders

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26
Q

What type of fraud is an audit supposed to pick up on?

A

Those which have a material effect on the limited nature of audit

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27
Q

Attempts to make auditors more responsible for discovering fraud misses the point that management ultimately is responsible for _____ within the company

A

Everything

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28
Q

What two categories of law and regulations are auditors interested in?

A
  1. Those with a direct impact on the financial statements

2. Those which provide a regal framework within which the company operates

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29
Q

The auditor is required by ISA ___ “Consideration of laws and regulations in an audit of financial statements” to obtain evidence about compliance with laws and regulations. It states the auditor should:

  1. Make enquiries of _______
  2. Inspect correspondence with relevant licensing or ______ bodies
  3. Ask those charged with governance if they are aware of any ___-________
A

250A,

Management, regulatory, non-compliance

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30
Q

The auditors should obtain _____ _______ that management has disclosed all known instances of actual or possible non-compliance with laws and regulations

If auditors cannot obtain sufficient appropriate evidence about the suspected non-compliance, what might this represent?

A

Written representations

A limitation on the scope of the audit, which will result in the auditors not being able to give an unqualified opinion

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31
Q

What should the auditor do when they suspect non-compliance? (2)

A
  1. Document findings

2. Discuss them with management

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32
Q

If an auditor suspects that management or those charged with governance are involved in compliance, who should they communicate this matter with?

If the above is not available, who should they report to as a matter of last resort?

A

The next higher level of authority at the entity

Legal aids for legal advice

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33
Q

When should non-compliance be communicated with shareholders?

A

Only when it causes the financial statements to not give a true and fair view, or if there is a fundamental uncertainty

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34
Q

Related party transactions: relevant ____ and _____ should be disclosed so that the reader of the financial statements can decide for themselves whether such transactions have led to a manipulation of the financial statements

Related parties are those people/companies that might have, or be expected to have, an undue ______ on the company being audited

A

Amounts, relationships

Influence

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35
Q

True or false:

Company law and accounting standards requires all transactions with related parties to be disclosed

A

True

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36
Q

Related party work:

At planning: materiality is set to include that which is material to the ___ _____ as well as the client, so the level of testing has to be planned at a much _____ threshold

At testing: what should the auditors request from the directors?

A

Related party, lower

A list of related parties

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37
Q

Which ISA deals with related parties?

A

550

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38
Q

Where related party transactions are found, what should the auditor check?

A

That the appropriate disclosures are made in the accounts

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39
Q

Global standards are developed by the _____ ________ __ ______ (IFAC). One of their sub-committees is the ______ _______ ____ _______ ________ ____ (IAASB)

A

International Federation of Accounts

International Auditing and Assurance Standards Board

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40
Q

What three key committees are there under the Financial Reporting Council regarding standards?

A
  1. Codes and Standards Committee (responsible for actuarial policy, audit and assurance, corporate governance, and accounting and reporting policy)
  2. Conduct committee (responsible for audit quality review etc.)
  3. Supervision committee (providing day-to-day oversight of the work of the FRC)
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41
Q

Following various high-profile failures, the ____ review and CMA investigation concluded that regulatory change was necessary

A

Kingman

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42
Q

What body will replace the FRC?

A

The Auditing, Reporting and Governance Authority (ARGA)

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43
Q

Define the expectations gap

A

The gap between the expectations of users of assurance reports and the firm’s legal responsibilities

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44
Q

To help reduce the expectations gap, the content of the Companies Act auditor’s report has been expanded to:

  1. Set out _____ of auditors and directors
  2. Explain how an audit is conducted
A
  1. Responsibilities
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45
Q

When the firm issued an engagement letter, the letter includes a paragraph reminding directors of their responsibilities and setting out the firm’s ________

A

Responsibilities

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46
Q

Audit committees for listed entities may need to perform a number of duties, such as

  1. ______ and monitor the external auditor’a independence and objectivity and the effectiveness of the external audit process
  2. Monitoring the work of _____ audit
A
  1. Review

2. Internal

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47
Q

Negligence in an audit can usually be traced to one of four main cases:

  1. Failure to assess audit _____ properly
  2. Failure to ______ appropriately to audit risk
  3. Failure to recognise and respond to situations where the auditor’s _____ is threatened
  4. The failure to recognise and respond to situations beyond the auditor’s area of ______
A
  1. Risk
  2. Respond
  3. Objectivity
  4. Competence
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48
Q

Which act and regulation single out accountants as having special responsibilities to act against money laundering and bribery?

A

The proceeds of crime act

Money laundering regulations

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49
Q

True or false

If an accountant has grounds for suspicion that money laundering is taking place at a client, they do not have to report it

A

False

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50
Q

If an accountant suspects money laundering, who should they report to? Who does this person report to?

What is the name of the position of the person who ensures the firm complies with regulation?

A

Their nominated officer (MLRO). They report to the National Crime Agency (NCA)

Money Laundering Compliance Principal (MLCP)

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51
Q

Failure to comply with money laundering legislation can result in a jail term or even ____ years

A

14

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52
Q

The introduction of POCA now means accountants must comply with “Know your client” (KYC):

  1. The firm will need to have checked the client’s identity and keep evidence of this for ____ years after they cease to be a client
  2. Auditors must think about the _____ nature of the business’s sales and the source of capital
A

Six

Real

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53
Q

Per the bribery act 2010, both _____ and accepting financial or other advantage to or from another party for either improper conduct or performing a legitimate task improperly constitutes a bribery offence

A

Offering

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54
Q

Auditors may have a duty to report suspicions of bribery to the NCA under _____

A

POCA

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55
Q

The government suggests the six following principles should be focussed on by audit firms to prevent bribery:

  1. Proportionate procedures to mitigate risk
  2. ____ level commitment
  3. Risk assessment that is ______
  4. Relationship due diligence procedures
  5. Communication and ______
  6. Monitoring and review
A

Top
Periodic
Training

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56
Q

Five fundamental principles?

A
  1. Integrity
  2. Objectivity
  3. Professional competence and due care
  4. Confidentiality
  5. Professional behaviour
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57
Q

Integrity: an accountant should be straightforward and ____ in all professional and business relationships

A

Honest

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58
Q

Objectivity: a professional accountant should not allow _____, conflict of interest or undue influence of others to override professional or business judgements

A

Bias

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59
Q

Professional competence and due care: a professional accountant has a continuing duty to _____ professional knowledge and skill at the level required to ensure that a client or employers receives competent professional service based on current developments in practice, legislation and techniques

A

Maintain

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60
Q

Professional behaviour: a professional accountant should comply with relevant _____ and _____ and should avoid any action that discredits the profession

A

Laws, regulations

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61
Q

Threats to objectivity:

  1. Self-_____ threat
  2. Self-______ threat
  3. M_______ threat
  4. A______ threat
  5. The familiarity or ______ threat
  6. I_______ threat
A
  1. Interest
  2. Review
  3. Management
  4. Advocacy
  5. Trust
  6. Intimidation
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62
Q

There are a number of general safeguards against threats to objectivity, including training and support systems offered by the ______

A

ICAEW

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63
Q

Procedures envisaged under the FRC ethical standard for threats to objectivity:

  1. ____ of duties between those engaged in audits and those providing non-audit services
  2. ______ of engagement partners and staff
  3. Consulting the ____ partner
  4. Procedures for evaluating the _____ of potential new client
A
  1. Segregation
  2. Rotation
  3. Ethics
  4. Integrity
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64
Q

The IFAC Code of Ethics is frequently referred to as the IESBA Code, after the ______ ____ ________ _______ for ______

A

International Ethics Standards Board for Accountants

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65
Q

FRC ethical standard section 1: independence is ‘freedom from conditions and relationships which, in context of an engagement, would compromise the ____ or _____ of the firm or covered persons’

A

Integrity, objectivity

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66
Q

FRC Ethical Standard Section 1: General requirements and guidance

This requires a firm to:

  1. Monitor _______, using systems to ensure that actual or possible breaches are promptly communicated to the engagement partner
  2. Evaluate the ______ of identified possible or potential breaches
  3. ______ management decision-taking in behalf of the audited entity
  4. Establish an _______ mechanism, to ensure that compliance actually happens
  5. _____ staff to communicate about ethical issues
A
  1. Compliance
  2. Implications
  3. Prohibit
  4. Enforcement
  5. Empower
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67
Q

UK listed and PIE clients require review of ethical compliance by an ______ partner

A

Independent

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68
Q

True or false:

The audit engagement partner should ensure that those charged with governance of the audited entity are appropriately informed on a timely basis of all significant facts and matters that bear in the auditor’s objectivity and independence

A

True

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69
Q

FRC Ethical standard section 2: if you are tempted to take a _____ interest in an entity you audit, do not do it

A

Financial

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70
Q

If staff move from the audit firm to the audited entity, there should be _____ during the process and consideration of the potential impact this may have

A

Disclosure

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71
Q

If a former director/employee of an audited entity who was in a position to exert significant influence over the preparation of the financial statements join the audit firm, they should not be assigned to a position where they can influence the conduct/outcome of the audit or its affiliates for _____ years following leaving the audit client

A

Two

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72
Q

What happens when a partner is appointed director or takes in some other key management position at the client within two years of being involved in the audit?

A

The firm shall resign as auditors (the firm shall not accept reappointment as auditor until a two-year period, commencing when the former partner ceased to have the ability to influence the conduct and outcome of the audit, has elapsed or the former audit partner ceases employment with the former audited entity)

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73
Q

Accepting a commission from a client constitute a self-____ threat

A

Interest

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74
Q

Recommending the services of a client tends towards an ____ threat because the accountant is promoting the client

A

Advocacy

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75
Q

An engagement partner/key staff involved in an audit engagement for a PIE or UK listed client can spend no longer than _____ years in post

This employment period can be seven years for engagement quality control reviewers, key partners involved and senior staff

A

Five

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76
Q

For non-listed clients, consideration should be given to a partner’s objectivity once they have held the role for ___ years

A

Ten

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77
Q

True or false

Contingent fees for both audit and non-audit work are not prohibited

A

Falsr

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78
Q

Audit fees should not be influenced or determined by the provision of ___-_____ services

A

Non-audit

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79
Q

For audit of PIEs only, the total fees charged by the firm for non-audit services must be limited to no more than ___% of the average audit fees paid in the last three consecutive financial years

A

70%

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80
Q

Fees for audit and non-audit services for a UK listed or PIE client should not exceed __% of the firm’s fee income

A

10%

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81
Q

The fee percentage limit for non-listed clients is __%

A

15%

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82
Q

True or false

The firm should resign as auditor where there is actual or potential litigation between the firm and the audited entity

A

True

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83
Q

Due to difficulties a new firm may find in its early years, the fee percentage limits do not apply for a ____ year grace period

A

2

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84
Q

True or false

It is never appropriate for the audit firm to find itself in a position where it undertakes, or is perceived as undertaking, a management role

A

True

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85
Q

Section 5 of the FRC ethical standard: sets out a clear general approach to non-audit services that the auditor is allowed to supply based on:

  1. What an objective, reasonable and informed ___ _____ would think about the impact on the firm’s objectivity and independence
  2. The need for the firm to have _____ to monitor and deal with potential
  3. The need for the client to have ‘informed ________’ where the audit firm concludes it can provide non-audit services to a client aware of these issues
A
  1. Third party
  2. Procedures
  3. Management
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86
Q

Section 5 of the FRC ethical standard: this approach states that the firm should:

  1. Consider the impact of the provision of ___-______ services
  2. Establish _____ to counter any threats
  3. Communicate with ‘those charged with _____’
  4. Document the rationale for the decisions taken
A
  1. Non-audit
  2. Safeguards
  3. Governance
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87
Q

What are audit related services?

A

Work carried out by the members of the engagement team that is closely related to the audit work

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88
Q

True or false

The firm can undertake internal audit work for any audit client

A

False

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89
Q

True or false

The firm should not undertake any work on IT systems which would be important to any significant part of the accounting or financial management system or to the production of the financial statements on which the auditors would place significant reliance

A

True

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90
Q

The firm should not undertake valuation services for a non-listed audited entity where the valuation would both a) involve a significant degree of _____ judgement, and b) have a ____ effect on the financial statements

A

Subjective, material

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91
Q

True or false

Litigation support and legal services should only be provided to non-listed clients, and must be non-subjective

A

True

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92
Q

Acting as expert witness or solicitor for a client may lead to ______ and _______ threats

A

Advocacy, management

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93
Q

Providing recruitment and remuneration services could lead to ____ and ______ threats

A

Management, familiarity

94
Q

Corporate finance services should not be accepted unless safeguards such as _____ teams, independent _____ review and external independent advice when required are available

A

Separate, partner

95
Q

Define transaction related services

Should these be undertaken generally?

A

Transaction related services are one-off engagements such as due diligence work

No

96
Q

True or false

Where an entity plans to change its capital structure, an audit firm may provide services

A

False (if they create a management, advocacy or self-review threat)

97
Q

For small entities, restrictions from sections one to five of the FRC ethical standard is waived, but:

  1. There needs to be ‘______ _____’
  2. The audit firm needs to extend its cycle of ____ reviews
  3. The departure needs to be mentioned in the auditor’s report
A
  1. Informed management

2. Cold

98
Q

Section 1 of the FRC ethical standard states that the impact of threats needs to be assessed when

  1. Appointment/reappointment as auditor
  2. When ______ the engagement
  3. When ______ the opinion
  4. Appointment/reappointment for ___-_____ services
  5. Potential threats are reported
A

Planning, forming, non-audit

99
Q

The auditor must consider ethics of the situation in the context of _____, ______ and _______ ______ engagements

A

Past, current potential future

100
Q

Section 114 of the ICAEW code of ethics states that the principle of confidentiality is not only to keep information confidential, but also to take all _______ steps to ______ confidentiality

Professional accountants should assume that all unpublished information is ______

A

Reasonable, preserve

Confidential

101
Q

Section 114 of the ICAEW code of ethics states that confidential information may disclosed when:

  1. There is a professional ____ when not prohibited by law
  2. Disclosure is permitted or ____ by law
  3. When disclosure may be justified as being in the ______ interest
A
  1. Duty
  2. Required
  3. Public
102
Q

ISA 240 requires that when the auditors become aware of suspected or actual frauds or instances of non-compliance, they should report this to ______, those charged with governance and/or regulatory and enforcement authorities

A

Management

103
Q

In the event of a professional accountant being alerted to something improper about a client hing the normal course of business, they should:

  1. Advise the informant to pass on the information to his ____ in accordance with company procedures
  2. Protect the _____ of the informant to the extent that this is possible
  3. Take care in the way that the ______ is used, if at all
A
  1. Employer
  2. Identity
  3. Information
104
Q

What does section 310 of the ICAEW code of ethics states a firm should do if it has two clients competing in the same industry?

A

Take reasonable steps to enable them to identify whether any conflicts of interest exist and take all reasonable steps to determine whether any conflicts are likely to arise in relation to new assignments involving both new and existing clients

105
Q

If a firm has two clients with conflicting interests, what should it do?

A

See if these can be successfully mitigated by the adoption of suitable safeguards, and implement these if so

This should be disclosed to both clients, along with the proposed safeguards. If consent is refused by the client, then the firm must not continue to act for one of the parties

106
Q

Quality control issues: the engagement partner

  1. May have ______ knowledge of the client and its environment
  2. May fail to _____ knowledge of the business on to the audit team
  3. May not adequately brief and supervise the team
  4. May not consult sufficiently with outside ______
  5. May not ______ the work carried out by the team with sufficient care
A

Insufficient
Pass
Experts
Review

107
Q

Quality control issues: the client

Could be incompetent, negligent or may even attempt to _____ the audit team

A

Mislead

108
Q

Quality control issues: the individual auditor

May not have adequate ______ of the client’s business

A

Understanding

109
Q

Approach to quality control: there should be procedures for ensuring only _____ clients are taken on and retained

A

Suitable

110
Q

Internal Systems of Quality Control (ISQC) 1: requires that the firm ______ its policies and procedures and communicates them to the firm’s personnel

A

Documents

111
Q

Importance of quality:

  1. ______ considerations should not override the quality of work performed
  2. Policies in relation to promotion, remuneration and performance incorporate the importance of ______ work
  3. Sufficient resources are allocated to the development, documentation and support of quality control policies and procedures
A
  1. Commercial

2. Quality

112
Q

Ethics is important to assurance providers, as this underpins the _____ trust required to make assurance services viable

A

Public

113
Q

Allocation of staff to assurance teams: firms are required to have policies to ensure that:

  1. Clients are informed of the identity of the ______ partner
  2. The engagement partner has the capabilities, competence, authority and time to perform his role
  3. The responsibilities of the partner in respect of the assignment are ______ defined and communicated to him
A

Engagement, clearly

114
Q

The engagement partner is responsible for ensuring team members know:

  1. _____ work they are supposed to be doing
  2. The _____ of the entity’s business
  3. Any risks relevant to the engagement
  4. ______ that might arise during the engagement
  5. The detailed approach to the engagement
A

What, nature, problems

115
Q

Four features of supervision per ISA 220:

  1. Progress tracking
  2. Considering the _____ and capabilities of individual members of the audit team
  3. Addressing _____ matters arising during the audit
  4. Identifying matters for consultation by more _______ engagement team members during the audit engagement
A

Competence, significant, experienced

116
Q

The purpose of an independent review (often referred to as a ____ review) is not to re-perform the other reviews in the audit process, but to what?

A

Hot

To provide an additional safety check about the validity of the firm’s opinion on the financial statements

117
Q

Any differences of opinion between auditor and consultation team must be resolved _____ to the assurance report being issued

A

Prior

118
Q

The ISQC states that firms must have policies in place to ensure that quality control procedures are adequate and ______

A

Relevant

119
Q

Monitoring might take place by ____ evaluation of the system and also by providing ______ review of selected engagement files to assess whether policies and procedures were put in place during the engagement

A

Ongoing, periodic

120
Q

Partners in the firm should receive reports of the results of monitoring of quality control procedures at least ____

A

Annually

121
Q

What two steps should be taken when monitoring reveals a problem with an individual?

A
  1. Remedial action

2. Additional quality control reviews on that person’s work

122
Q

People checking compliance with quality control standards should liaise closely with the _______ department of partner to ensure that any misunderstandings or problems with controls are corrected during the on-the-job training

A

Training

123
Q

When are cold reviews undergone?

A

After the assurance assignment has been completed

124
Q

A cold review is performed by:

  1. Other _____ in a firm
  2. By a _____ specifically constituted to conduct such reviews
  3. By a suitably qualified _____ consultant
A
  1. Partners
  2. Team
  3. External
125
Q

When review teams uncover failures, these should be:

  1. _____ within the firm
  2. Additional ____ should be put in place
  3. Changes to the firm’s policies and _____
  4. ______ action against those who repeatedly fail to comply with the firm’s standards
A
  1. Communicated
  2. Training
  3. Procedures
  4. Disciplinary
126
Q

If someone can demonstrate that you owed them a duty of care and they suffered loss by relying on the financial statements, they could sue you under _____ of negligence

A

Tort

127
Q

Audit firms must carry ______ ______ insurance, which means that any settlement will be paid out by the insurance company

A

Professional indemnity

128
Q

Many assurance firms operate as partnerships whose partners have unlimited and ____ several liability

A

Joint

129
Q

For limited liability agreements to be valid they must both:

  1. Cover only _____ financial year(s)
  2. Be approved by a resolution of the company’s shareholders

The arrangements are only effective to the extent that they are _____ and reasonable in the particular circumstances

A

One, fair

130
Q

Limited liability contractual limits could be set in a variety of ways, such as:

  1. Based on the auditor’s _______ share of the responsibility for any loss
  2. By reference to the ‘fair and reasonable’ test
  3. A cap on liability, which could be either a ____ amount or on the basis of an agreed formula
  4. Some combination of the above
A

Proportionate, monetary

131
Q

Per CA 2006, what is the penalty for “knowingly or recklessly causing an auditor’s report on company accounts to include matter that is misleading, false or deceptive in a material particular”?

A

A fine

132
Q

Define tender

A

A written offer to supply goods or perform work at a stated cost or rate; a bid

133
Q

Factors influencing consideration of a company in the tender process:

  1. Price
  2. _____ of service auditors are likely to provide
  3. _____ of the business the auditors have
  4. The _____ of the industry the auditors have
  5. The proposed ______ on the audit team
  6. References obtained about the audit firm
A

Quality
Knowledge
Experience
Personnel

134
Q

What risk does lowballing present?

A

Increases the self-interest threat of not being able to complete the audit to the appropriate standards in a commercial way

135
Q

Per the Code of Ethics, when should the basis for fee computation be disclosed and discussed with the client?

A

As soon as possible

136
Q

Factors impacting cost of contracts:

  1. Seniority and professional experience of persons engaged
  2. ____ spent by the time on the job
  3. The degree of risk and responsibility
  4. The ____ of the client’s operation
  5. The _____ of the work to the client
A

Time
Complexity
Importance

137
Q

Factors to asses when accepting an assurance engagement:

  1. The results of the risk analysis
  2. Whether there are ethical issues which prevent acceptance
  3. Whether the firm has sufficient ___ and _____
  4. Whether all ______ requirements have been met
A

Experience, resources

Legal

138
Q

Changing auditors process:

  1. Prospective auditor explains they have a professional duty to communicate with the _____ ______
  2. The client should give the existing auditor _____ authority to discuss the client’s affairs with the prospective auditor
  3. The prospective auditor writes to the existing auditor, seeking _______ which could influence their decision
  4. The existing auditor should quickly answer the communication from the prospective auditor
A
  1. Existing auditor
  2. Written
  3. Information
139
Q

True or false

A professional accountant invited to undertake work which is additional to and related to continuing work carried out by another professional adviser should notify that other professional adviser of the work he has been asked to undertake

A

True

140
Q

In order to carry out the audit of a company, the auditor first needs to be appointed by ______ _______

A

Ordinary resolution

141
Q

The shareholders of a company appoint the auditor at where?

A

The AGM or other general meeting of the company at which the financial statements are put forward for approval by members

142
Q

When must auditors be appointed by?

A

By the end of the 28 days after the last date on which the accounts must be filed

143
Q

In rare circumstances where no auditor has been appointed at the appropriate time, the company must inform who? Within how long?

A

The Secretary of State, within one week of the relevant time expiring. The Secretary of State will then appoint an auditor

144
Q

How does a company remove the existing auditor and appoint a new one?

When this happens, the auditors must make a statement of ______

A

Through ordinary resolution with special notice at a general meeting

Circumstances

145
Q

If the auditor resigns during his year at office, he must submit ______ notice to the company. The auditor must also send a statement of _______

A

Written, circumstances

146
Q

Rights of a resigning auditor:

  1. Request a ____ _____ to set out the reasons for their resignation
  2. Require the company to circulate the statement of _____ in advance of the meeting
A
  1. General meeting

2. Circumstances

147
Q

On receipt of the auditor’s resignation, the company must notify the _______ of companies and anyone entitled to receive a copy of the company’s accounts

A

Registrar

148
Q

True or false

If an auditor is not reappointed or the company decides against reappointment, the auditor is not required to prepare a statement of circumstance’s

A

False

149
Q

An auditor who ceases to hold office as an auditor of an unquoted company is required to deposit at the company’s registered office either of:

  1. A statement of circumstances
  2. A statement that there are no such ____ if he considers this to be the case
A

Circumstances

150
Q

True or false

Auditors of unquoted companies do not need to make any statement if certain situations exist, such as reaching the end of their term of office, or no longer being the auditor due to any kind of exemption

A

True

151
Q

True or false

The auditor who ceases to hold office for a quoted company must deposit a statement of circumstances connected with his ceasing to hold office at the company’s registered office

A

True

152
Q

Per ISA 210, it is a requirement that the terms of the engagement are put in _______

A

Writing

153
Q

The engagement letter should cover the following matters:

  1. The objectives and ____ of the audit
  2. Management’s _____ for the financial statements
  3. The form of the auditor’s _____ that will arise from the audit
  4. The fast that due to the test nature and other limitations of an audit, there is an unavoidable risk that some _____ _______ may remain undiscovered by the auditor
  5. The fact that auditors are entitled to _____ access to records, documents and other information requested in connection with the audit
A
  1. Scope
  2. Responsibility
  3. Reports
  4. Material misstatement
  5. Unrestricted
154
Q

True or false

When the audit is a recurring audit, it is not necessary to issue a new letter each year

A

True

155
Q

The following might prompt the issue of a new engagement letter for a recurring engagement:

  1. Indications that the client misunderstands the terms of the _____
  2. Revised or special terms of the engagement
  3. A recent change in _____ management
  4. A significant change in ownership, nature or size of the company
A

Engagement, senior

156
Q

If terms are changed and the auditor and client cannot agree, what should the auditor do?

A

Withdraw from the existing arrangement

157
Q

Issues to consider for reviewing a cash flow forecast:

  1. The intended ____ of the information
  2. Whether the information will be for _____ or ______ distribution
  3. The nature of the assumptions
  4. The elements to be included in the information
  5. The _____ covered by the information
A
  1. Use
  2. Limited, general
  3. Period
158
Q

Define material

A

Information is material if it’s omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements

159
Q

Define performance materiality

A

An amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole

160
Q

Items may material due to their amount/value/quantity or their ______/quality

A

Nature

161
Q

Materiality is often based on the following suggested ranges:

Revenue: ?
Profit before tax: ?
Gross assets: ?

A

Revenue: 0.5% - 1%
Profit before tax: 5% - 10%
Gross assets: 1% - 2%

162
Q

Some matters are automatically material, such as matters relating to ______ or related parties

A

Directors

163
Q

Performance materiality should be set so that misstatements which are in themselves immaterial are likely to be _____

A

Detected

164
Q

Return on capital employed formula?

A

Profit before interest and tax / (equity + net debt)

165
Q

Return on shareholders funds formula?

A

Net profit for the period / (share capital + reserves)

166
Q

Gross profit percentage formula?

A

(Gross profit * 100) / revenue

167
Q

Cost of sales percentage formula?

A

(Cost of sales * 100) / revenue

168
Q

Operating cost percentage formula?

A

(Operating costs/overheads * 100)/ revenue

169
Q

Net margin/operating margin formula?

A

(Profit before interest and tax * 100) / revenue

170
Q

Current ratio formula?

A

Current assets : current liabilities

171
Q

Quick ratio formula?

A

Receivables + current investments + cash : liabilities

172
Q

Gearing ratio formula?

A

Net debt / equity

173
Q

Interest cover formula?

A

Profit before interest payable / interest payable

174
Q

Net asset turnover formula?

A

Revenue / capital employed

175
Q

Inventory turnover formula?

A

Cost of sales / inventories

176
Q

Trade receivables collection period formula?

A

(Trade receivables * 365) / revenue

177
Q

Trade payables payment period formula?

A

(Trade payables * 365) / credit purchases

178
Q

To understand how risky a client is:

  1. _____ are they?
  2. ____ do they do?
  3. ___ do they do it?
  4. Are there special circumstances that govern their business?
  5. How ____ are their staff?
A
  1. Who
  2. What
  3. How
  4. Competent
179
Q

Understanding the client’s business properly allows you to:

  1. Assess the ______ the audit team needs
  2. _____ your audit work so that it is appropriate and efficient
  3. Be able to assess what _____ have put been put in place by the client
  4. Be able to assess any ______ risks which need special attention
  5. Be able to perform _____ procedures
  6. Comply with _____ requirements
A
  1. Competencies
  2. Plan
  3. Controls
  4. Significant
  5. Analytical
  6. Professional
180
Q

During a period of economic downturn, what will accountants of the client team be under pressure to do?

What is this a form of?

A

Present favourable results by artificially increasing revenues or profits

This a form of fraud (aggressive earnings management)

181
Q

External reports auditors can use:

  1. _____ reference agencies
  2. Industry surveys
  3. Industry publications
  4. Companies House searches
A
  1. Credit
182
Q

Each member of the audit team should read _____ year’s file

A

Last

183
Q

As auditors, you should ____ to the people responsible for the area you are auditing

A

Talk

184
Q

To understand the client, auditors need to have a good understanding of any laws and regulations that have an impact on its operations. These are considered to be of two types:

  1. Those which affect the _____ of financial statements
  2. Those which affect the way the client conducts its business
A

Preparation

185
Q

ISA 402 deals with outsourcing, specifically asking:

  1. The _____ of the services provided by the service organisation
  2. The _____ and materiality of transactions processed
  3. The degree of _____ between the activities of the service organisation and those of the company
  4. The nature of the relationship between the user entity and the service organisation, including the relevant contractual terms
A

Nature, nature, interaction

186
Q

Define business risk

A

Business risk is the risk inherent to the company in its operations

187
Q

What are the three general categories of business risk?

A
  1. Financial risk
  2. Operational risk
  3. Compliance risk
188
Q

Define audit risk

A

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated

189
Q

Give the audit risk equation

A

Audit risk = inherent risk * control risk * detection risk

190
Q

Define control risk

A

The risk that misstatement will arise due to errors not being prevented, detected and/or corrected on a timely basis by the entity’s controls

191
Q

There will always be control risk due to the limitations of ______ ______

A

Internal controls

192
Q

Control testing will include assessment of direct and indirect controls. Define both of these terms

A

Direct controls: those that address risk of material misstatement at the assertion level
Indirect controls: those that support direct controls

193
Q

Define detection risk

A

The risk that an auditor’s procedures to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements

194
Q

Define sampling risk

A

The risks that opinions you form from the results of your sample are different from those you would have formed if you had been able to examine the whole population

195
Q

Non-sampling risks may arise when there is:

  1. A lack of _____ of the nature of your client’s business
  2. Use of invalid _____ techniques
  3. Failure to investigate a particular class of assets, liabilities or transactions
A

Understanding, sampling

196
Q

A significant risk is significant because of either a) due to likelihood and impact, or b) it is required by an ____

A

ISA

197
Q

Professional scepticism should include:

  1. Sufficient enquiry and _____ of the client
  2. Consideration of _______ treatment for items within the financial statements to avoid an audit approach that does not keep up with how the client and its environment changes over time
A
  1. Challenge

2. Alternative

198
Q

Audit data analytics (ADA) has helped the elimination of ______ risk

A

Sampling

199
Q

What is blockchain technology, and how is it used?

A

Blockchain technology uses encryption to record confirmed events on shared distributable ledgers that are secure

200
Q

One of the most useful aspects of Audit Data Analytics (ADA) is being able to understand the findings of risk assessment more easily than ever before. The audit client’s data is fed into the firm’s ADA software and the results can be illustrated using a ________ of metrics

A

Dashboard

201
Q

Audit Data Analytics (ADA) has limitations, such as:

  1. _____ of adopting the new technology, including extensive staff training
  2. The ______ of the underlying data
A
  1. Cost

2. Quality

202
Q

New appointment increases _____ risk due to lack of cumulative/prior knowledge from previous audits

A

Detection

203
Q

Possibles changes to audit following assessment of risks:

  1. Assign additional or more _____ staff
  2. Use of experts
  3. Incorporating more ______ into the audit procedures
A
  1. Experienced

3. Unpredictability

204
Q

The evaluation of the control environment and the client’s internal control systems will determine whether a _____ approach or a combined approach will be taken (mix of controls and _____ procedures

A

Substantive, substantive

205
Q

To gain confidence over the client’s controls, auditors ensure that they

  1. Operate in the way they think that they do (_______ testing)
  2. Are effective (test of controls)
A

Walkthrough

206
Q

What are the two sets of circumstances that determine the need for carrying out a test of controls?

A
  1. When they are intending to rely on controls to reduce audit risk
  2. When they are unable to derive sufficient evidence from substantive procedures alone
207
Q

Analytical procedures are appropriate for ____ volumes of predictable transactions

A

Large

208
Q

True or false

Tests of details should always be carried out

A

True

209
Q

True or false

  1. Financial statements don’t need to be agreed to underlying accounting records
  2. Material journal entries must be examined
A
  1. False

2. True

210
Q

Elements of estimations:

  1. Complexity
  2. Subjectivity
  3. Estimation _______ (any inherent lack of precision in the measurements used)
  4. Other inherent risk factors
A

Uncertainty

211
Q

Auditing estimates: the auditor should consider the following sources of evidence in descending order:

  1. Evidence from _____ events
  2. Test management’s own ______
  3. The auditor should consider developing their own estimate
A
  1. Subsequent

2. Estimate

212
Q

True or false

An audit plan does not need to make it perfectly clear when the deadline is and how much the budget is

A

False

213
Q

Typically, much of the systems assessment work and tests of detail on the statement of profit or loss will be carried out at the ______ stage

A

Interim

214
Q

The external auditors has _____ responsibility for the opinion expressed, though some internal audit work may be helpful to him in forming a decision in one or more areas

A

Sole

215
Q

True or false

An effective internal audit could eliminate the need for external audit procedures entirely

A

False

216
Q

Instances where internal audit can’t be relied upon:

  1. Where the ____ of the internal audit function has been compromised because of its organisation status
  2. Where internal audit lacks a systematic and disciplined approach
A

Objectivity

217
Q

True or false

Internal auditors are prohibited from producing direct assistance to external auditors in audits conducted in accordance with ISAs (UK)

A

True (prohibition not in the IAASB ISA)

218
Q

What does an external auditor do if they are to rely on an internal auditor’s work?

A

They should confirm that internal audit has satisfactorily tested controls in detail by re-performing a sample of internal audit’s tests

219
Q

True or false

Liaison with internal auditors should take place at regular intervals throughout the audit

A

True

220
Q

Auditors have _____ responsibility for their opinion, but may use the work of an expert

A

Sole

221
Q

Impacting factors on management’s expert:

  1. The nature, scope and objectives of management’s work
  2. The extent to which management can exercise _____ over the work of the management expert
  3. Whether the management’s expert is subject to technical, professional or industry _______
  4. Any _______ within the entity over the management’s expert’s work
A
  1. Control
  2. Requirements
  3. Controls
222
Q

The agreement between the auditor and the auditor’s external expert may take the form of an ________ letter

A

Engagement

223
Q

________ auditors are auditors who perform work on financial information related to a component of the group audit

A

Component

224
Q

_______ ______ team are the auditors with responsibility for performing work on the consolidation process, communicating with CAs and reporting on the group financial statements

A

Group engagement

225
Q

True or false

If a subsidiary of a parent company is being audited by another firm, the group engagement team (GET) has the right to require all information and explanations from the firm

A

True

226
Q

For audits of small companies, there may be a form of _____ applicable meaning a full audit is not required

A

Exemption

227
Q

A charity’s financial accounts should comprise:

  1. A _______ of _____ _______ (SOFA) that shows all resources made available to the charity and all expenditure incurred and reconciles all changes in its funds
  2. A summary income and expenditure account
  3. A balance sheet
  4. A statement of cash flows
  5. Notes to the accounts
A

Statement of financial activities

228
Q

True or false

  1. Charity accounts do not need to include disclosures of employee benefits for key management
  2. Charity accounts must disclose that no employees were paid above £60,000
A
  1. False

2. True

229
Q

Unincorporated charities are exempt from audits if their gross income is less than £___ million unless gross assets exceeds £3.26 million and gross income exceeds £___________

A

£1 million, £250,000

230
Q

The partner signing off the financial statements must ask three key questions:

  1. Do the financial statements comply with the provision of the ______ _____?
  2. Do the financial statements make sense?
  3. Has the _______ report been drafted properly?
A
  1. Companies Act

3. Auditor’s

231
Q

Every firm should use a checklist to ensure that the financial statements comply with the _____ requirements of the companies act

A

Disclosure

AA (1 decks)

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