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108 Cards in this Set
- Front
- Back
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What six threats can relate to objectivity, integrity and independence?
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* Self-interest
* Self-review * Familiarity * Advocacy * Intimidation * Management |
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What are the five elements of an assurance engagement?
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* A three party relationship involving a practitioner, a responsible party, and intended users
* An appropriate subject matter * Suitable criteria * Sufficient appropriate evidence * A written assurance report in the form appropriate |
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ACCA suggest that lead audit partners should be rotated no less frequently than how many years?
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ACCA suggest that the lead partner should be changed at least every 5 years.
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What is a familiarity threat?
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Because of a close relationship, members of the assurance firm become too sympathetic to members of the client firm, so that objectivity and scepticism are lost
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The purpose of corporate governance is to facilitate effective entrepreneurial and prudent management that can deliver long-term success of the company. What are the five main principles of the UK Corporate Governance Code?
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Leadership
Effectiveness Accountability Remuneration Relations with shareholders |
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What is a NED?
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A NED is a non-executive director
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What are the three components of audit risk?
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Inherent risk, control risk and detection risk
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In relation to corporate governance, what is meant by the ‘agency problem’?
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Shareholders own the company and are its principles. Directors run the company and are the agents of the shareholders. There can be a problem if directors to not run the company in the best interests of the shareholders (eg eccessive remuneration is arranged for the directors).
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What is another name for a limited assurance engagement?
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A negative assurance
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Define corporate governance
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Corporate governance: the system by which companies are directed and controlled
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What two risks contribute to the risk of material misstatement in the financial statements?
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Inherent risk and control risk
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What is a statement of circumstances?
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A statement of circumstances is a statement that auditors are required to make upon resignation or removal as auditors. It will state whether there are any untoward reasons for their removal or resignation – such as non-cooperation by the directors.
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What are the five fundamental principles of the ACCA’s ethical code?
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* Integrity
* Professional competence and due care * Confidentiality * Professional behaviour * Objectivity |
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What two types of risk make up detection risk?
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Sampling risk and non-sampling risk.
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What sub-committee of the board of directors is responsible for finding new directors?
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The nomination committee
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The UK Corporate Governance Code states that there should be a clear division … between the running of the board and the executive responsibility for the running of the company’s business. To comply with this, what roles should be split?
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The roles of Chief Executive Officer and Chairman should be split.
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When the audit firm changes, the proposed new auditor should contact the retiring auditor. If the client refuses permission for communication to take place, what should the proposed new auditor do?
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Decline the appointment
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Who sets the International Standards on Auditing?
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The International Standards on Auditing are set by International Auditing and Assurance Standards Board (IAASB) – part of the International Federation of Accountants (IFAC)
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What are the two general reasons that would lead a practitioner not to issue an unqualified conclusion to an assurance engagement?
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There is a limitation on the scope of the practitioner’s work.
The assertion is not fairly stated, and the subject matter information is materially misstated. |
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In relation to corporate governance, what does comply or explain mean?
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Listed companies are expected to comply with the corporate governance code or, if they don’t, explain why not.
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What are the two categories of substantive test?
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Analytical procedures and tests of detail
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What are the suggested limits for the percentage of total fees coming from any one client (‘ordinary clients’ and special interest clients)?
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15% for ordinary; 10% for special interest.
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Define an audit
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An audit is the independent examination of, and expression of opinion on, the financial statements of an entity.
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How many non-executive directors should be on a board of directors to comply with the UK Corporate Governance Code?
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NEDS not less than 50% of board; not less than 2 in small companies
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What sub-committee of the board of directors is responsible for determining directors’ pay?
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The remuneration committee
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What are the audit assertions as represented by ‘ACCA COVER’?
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Accuracy
Completeness Cut off Allocation Classification and understandability Occurrence Valuation Existence Rights & obligations (ownership) |
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What aspects of a client’s undertaking is computer test data used to test?
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The operation of the client’s computer programs.
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What qualities should the auditor look for in third parties who are carrying out some audit work?
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The third parties should be: qualified, experienced, independent and professional
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ISA500 states that auditors must obtain xxxxxxxxxxxxx xxxxxxxxxxxxx audit evidence to be able to draw reasonable conclusions on which to base an audit opinion.
What words are represented by xxxxxxxxxxxxx xxxxxxxxxxxxx ? |
Sufficient appropriate
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A common element of analytical procedures is ratio analysis.
Name three sources of comparison for any ratios calculated. |
* Previous years’ ratios,
* Budget ratios, * Industry standard ratios |
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Does non-sampling risk increase or decrease as the sample size increases?
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Non-sampling risk does not depend on sample size. This risk is affected by the experience and ability of the auditor, supervision and planning.
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What are the two general classes of control found in computer systems?
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General controls – development, prevention of unauthorised changes etc., backup. Can be classified as development and administrative controls.
Application controls – initiation, recording, processing and recording transactions. |
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What are auditors’ duties with respect to fraud?
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Managers, not auditors, are responsible for the prevention or detection of fraud. However, auditors should be aware of material misstatement due to fraud. Once discovered, fraud should be reported to appropriate management.
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At which stage of an audit (interim or final) will the documentation of systems and procedural tests usually be carried out?
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These processes are usually carried out at the interim audit stage
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Are analytical procedures part of tests of control or substantive tests?
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Substantive tests
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What aspects of a third party expert’s audit work should an auditor examine?
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The auditor must examine the expert’s work with respect to: consistency with other evidence, assumptions made, use and accuracy of source data.
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Does sampling risk increase or decrease as the sample size increases?
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As more items are examined in the sample, sampling risk decreases.
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What aspects of a client’s undertaking do computer audit programs examine?
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Computer audit programmes examine client data.
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What is another name for a reasonable assurance engagement?
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A positive assurance
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What are the six objectives of audit planning?
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The six objective of audit planning are to
* Ensure that appropriate attention to important areas * Identify potential problems * Ensure that work is completed expeditiously * Help with the proper staffing and work assignment * Coordinate with other parties * Facilitate review |
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What is sampling risk?
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The risk, that because the auditor is relying on a sample, conclusions drawn about the population are wrong.
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What are the sources or procedures for obtaining of audit evidence?
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Analytical procedures, enquiry, confirmation, inspection, observation, recalculation and reperformance
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What matters should the auditor agree with third parties who are carrying out some audit work?
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The auditor should agree the following in writing:
* Nature, scope and objectives of work * Respective responsibilities * Nature, scope and timing of communications * That the expert observes confidentiality |
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List six types of sampling:
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* Random selection,
* Systematic selection, * Haphazard selection, * Sequence/block selection, * Monetary unit sampling, * Stratified sampling. |
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Under what conditions would substantive tests be carried out instead of tests of control?
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Substantive tests would be carried out in preference to tests of control if:
controls did not exist or were not operating effectively, or there were relatively few transactions so that substantive tests were more efficient. |
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What is performance materiality?
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Materiality relates to financial statements as a whole. Additionally, a lesser amount is set when designing audit procedures to reduce the risk that misstatements in aggregate exceed FS materiality. This is performance materiality.
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What are the five components of internal control?
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* The control environment
* Risk assessment process * Control activities * Information system * Monitoring controls |
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Define ‘materiality’
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A matter is material if it omission or misstatement would reasonably influence the economic decisions users.
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What are the two types of audit file?
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Current audit file (detail’s this year’s work) and permanent audit file (holds more permanent information such as organisation charts, letters of engagement etc).
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What are RQBs and RSBs?
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To be an auditor, the person must:
Pass an approved set of professional examinations, set by a Recognised Qualifying Body (RQB) eg the ACCA Become a member (and stay a member!) of a Recognised Supervisory Body (RSB) eg the ACCA |
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Define a contingent liability
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A contingent liability is a possible liability arising from past events…. existence confirmed by future events
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ISA 315 categorises audit assertions into three groupings. What are those groupings?
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ISA 315, Audit evidence divides assertions into
* Transactions and events * Account balances * Presentation and disclosure |
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In a computer system, what is meant by the term ‘standing data’?
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Standing data (also known as reference data) does not change often.
For example, wage rates or customer addresses. However, this data is often accessed and used, so an error in standing data can cause many other errors. |
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In an accounting system, all credit notes issues are authorised by the chief accountant.
Is this an example of a control objective, a control procedure or a control test? |
This is an example of a control procedure.
The control objective is that credit notes are issued only for legitimate reasons; the test of control would be inspecting the credit notes for the manager’s signature. |
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What audit assertions relate to transactions?
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The audit assertions relating to transactions are:
* Occurrence * Completeness * Accuracy * Cut off * Classification |
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What is the correct accounting treatment of a contingent liability where the outflow of resources is probably not required?
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Disclose but do not make a provision.
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Auditors routinely report internal control matters to management in a management letter.
What are the normal three headings (or columns) in such letters? |
The nature of the weakness, the possible consequence of the weakness, how to fix the weakness.
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Is cut-off correct if an item is included in closing inventory, if a goods received note has been issued, but no supplier invoice has been received or accrued for?
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Cut-off is incorrect. If an item is included in closing inventory it needs to be accounted for in purchases. Therefore debit purchases and credit either payables or purchases reserve.
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What sort of audit report should be issued if going concern doubts are not fully disclosed in the financial statements.
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The audit report will be qualified because the financial statements contain a material misstatement by not disclosing the going concern problem.
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Define an adjusting event
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An adjusting event is one which provided evidence of conditions that existed at the date of the statement of financial position.
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Define a non-adjusting event.
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A non-adjusting event is one that relates to conditions that arose after the date of the statement of financial position.
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In an ICEQ does the answer ‘No’ imply that a control is present or absent?
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In an ICEQ the answer ‘No’ implies that a control is present.
For example “Can unauthorised overtime be paid?” Answer = ‘No’ means overtime payments are controlled. |
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What are the audit assertions relating to year end balances?
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The audit assertions relating to year end balances are:
* Existence * Rights and obligations * Completeness * Valuation * Allocation |
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What are the three methods that can be used to record and document accounting systems?
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* Narrative notes,
* Flowcharts, * Questionnaires (ICQs and ICEQs). |
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What sort of audit report should be issued if going concern doubts are fully disclosed in the financial statements.
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The audit report should contain an emphasis of matter paragraph drawing users’ attention to the note relating to going concern. This is not a qualification because the financial statements are as right a they can be.
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To whom should the auditor report (a) significant control deficiencies and (b) other weaknesses?
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(a) Significant deficiencies should be communicated to those charged with governance. Defined as: when a control is designed, implemented, or operated… is unable to prevent or detect misstatements on a timely basis, or such a control is missing
(b) Other weaknesses should be communicated to management |
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What are the audit assertions relating to presentation and disclosure?
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The audit assertions relating to presentation and disclosure are:
* Occurrence * Rights and obligations * Completeness * Classification and understandability * Accuracy * Valuation |
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In an ICQ does the answer ‘Yes’ imply that a control is present or absent?
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In an ICQ the answer ‘Yes’ implies that a control is present. For example “Is all overtime authorised by a manager?” Answer = ‘Yes’ means overtime payments are controlled.
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For how long after the date of the statement of financial position should going concern be assessed?
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12 months
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What is the correct treatment of a contingent asset where the inflow of economic benefits is not probable?
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No disclosure; no provision.
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What are the general methods for testing controls?
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Enquiries, including management views, as to whether controls are operating
Inspection eg of signatures on documents Observation eg watching goods received being counted Re-calculation and re-performance eg reperforming a bank reconciliation to ensure that it was properly carried out. |
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What are the two types of receivables circularisation?
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Positive: where everyone should reply whether or not the balance is in agreement.
Negative: where only those disagreeing with the balance should reply. |
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What are the five inherent limitations to internal control?
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* Human error
* Collusion * Bypass of controls * Costs of control > benefits * Non-routine transactions for which no system has been developed. |
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Is cut-off correct if an item is not included in closing inventory, no goods received note has yet been issued, but a supplier invoice has been received and processed?
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Cut-off is incorrect. If the item is not in inventory because it has not been received, it should not be in purchases and payables
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Is cut-off correct if an item is included in closing inventory, a sales despatch note has not been issued and no sales invoice has been issued.
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This is correct and is the normal position for closing inventory.
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What type of audit report is given if the FS contain a non-material misstatement?
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An unmodified report (if a matter is not material, a ‘clean’ audit report can be issued)
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What range of percentage of profit is often taken as guidance for materiality?
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½ – 1% of revenue
1 – 2% of total assets 5 – 10% of profit before tax |
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In what two circumstances might management representations provide the only source of audit evidence?
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Where knowledge is confined to management
Reliance on the judgement/opinion of the directors |
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What sort of ethical threat arises from the auditor auditing financial statements that the auditor also prepared?
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A self-review threat.
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What sort of ethical threat can arise from overdue fees?
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A self-interest threat because the auditor is anxious to be paid.
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What sort of ethical threat arises from the auditor owning shares in the company audited?
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A self-interest threat because the auditor wants the share price to rise.
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An auditor gives weekly advice to a client on a wide range of matters (financial and non-financial).
What sort of threat can this give rise to? |
A management threat.
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What are the three elements of the ACCA’s ethical framework?
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Fundamental ethical principles, threats to those and safeguards against the threats.
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In a listed company, to whom should internal audit report?
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The audit committee.
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Analytical procedures are used at three stages of an audit. What are these?
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The planning stage; as a source of audit evidence (substantive test); at the final review stage.
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What sort of ethical threat arises from the auditor being a close friend of the financial director of the company being audited?
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A familiarity threat
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What type of audit report is given if the FS contain a pervasive material misstatement?
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Adverse opinion
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What are the words missing from the following extract from the audit report?
Auditor’s Responsibility ….we … plan and perform the audit to obtain XXXXXXXXXXXX whether the financial statements are free from XXXXXXXXX. |
Auditor’s Responsibility
… we … plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. |
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Why is it important that audits are properly documented? (Four reasons)
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To show that the audit work has been done properly
To enable senior staff to review the work of junior staff To help the audit team in future years To encourage a methodical, high-quality approach. |
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What is the title of the paragraph that can be inserted in an audit report to draw users’ attention to a note in the financial statements?
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An emphasis of matter paragraph
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Of what do financial statements consist?
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* Statement of financial position
* Income statement * Statement of changes in equity * Cash flow statement * Notes * Any other material identified as being part of the financial statements |
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In what circumstances would auditors refer to the directors’ report in their audit report?
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Auditors would refer to the directors’ report in their audit report if it contained anything that was at odds or contradictory with the financial statements.
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Is the following true or false?
Under the UK government code listed companies are required to have an internal audit department |
False. Internal audit is encouraged and the need for it has to be kept under review, but it is not mandatory.
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What are the two reasons for which an audit report can be qualified?
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1 The Financial Statements contain a material misstatement
2 The auditor has not been able to obtain sufficient appropriate audit evidence to conclude that the FS are free from material misstatement. |
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Describe what is meant by ‘fair’ in ‘true and fair’
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Fair: the information is free from discrimination and bias and is in compliance with expected standards and rules. It reflects the commercial substance of the transactions.
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What is meant by ‘audit risk’
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Audit risk is the risk that an inappropriate audit opinion is given.
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Which of the following pairs of evidence are better?
External v entity’s records Indirect evidence v auditor-direct Oral v Written |
External is better than entity’s records
Auditor direct is better than indirect evidence Written is better than oral |
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What type of audit report is given if the auditors’ ability to find sufficient appropriate audit evidence is pervasive?
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Disclaimer of opinion
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Is the following true or false?
The inclusion of an emphasis of matter paragraph in the audit report results in a modified audit opinion. |
False. An emphasis of matter paragraph does not cause a modified opinion nor does it cause the FS to be qualified.
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Describe what is meant by ‘true’ in ‘true and fair’
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True: the information is factual and conforms with reality.
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Who issues ISA?
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The IFAC issues ISA through their sub-committee, the International Auditing and Assuarance Standards Board (IAASB)
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IAASB issues what 3 things?
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* International Standards on Auditing, with which auditors are expected to comply in the conduct of and audit;
* Discussion papers, which provide timely notes on new or emerging issues; * Practice statements, which assist in applying Audit Standards to particular circumstances and industries |
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Explain the auditor's duty of confidentiality
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Auditors may disclose matters to third parties without their client's consent if it is in the public interest, and they must do so if there is a statutory duty to do so
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In which case a partner from another office must take responsibility?
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It is undesirable for a practice to derive too great a part of of its professional income from one client. A practice should ensure that recurring fees paid by one client do not exceed 15% of the gross fees. Where a partner within a practice is dependent for his income on profits from any one office which derives more than 15% of its gross fees from one client, a partner from another office should take final responsibility for the audit report
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Examples for self-interest threats
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* Concern over employment security
* Incentive arrangements |
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Examples for familiarity threats
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* Long association with business contacts
* Acceptance of gifts |
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Why is an audit engagement letter is issued?
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* Set out billing arrangements
* Explain the respective responsibilities of directors and auditors * Set out the nature of the work that will be performed to the client * Prevent misunderstandings between auditor and client |
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An incoming auditor wishes to have access to the working papers of the outgoing auditor to satisfy himself as to the accuracy of the opening balances. In these circumstances what rights does the incoming auditor have?
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No statutory or ethical right to access but the outgoing auditor would be expected to afford the incoming auditor reasonable cooperation in this matter
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