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193 Cards in this Set
- Front
- Back
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Define information gap
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Difference in knowledge between stewards (directors) and owners (shareholders)
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What are adequate accounting records?
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Show and explain transactions
Disclose with reasonable accuracy the financial position of company at that time Enable directors to prepare accounts in line with CA 2006 / IFRS Entries showing money received/expended by company with explanations Record of assets/liabilities (if dealing in goods) closing stock stocktaking statements statement of goods bought/sold and buyers/sellers except for retail |
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How long should records be kept for private and public companies?
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3 years private
6 years public |
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When does year end have to be chosen?
When must first year end be? What is the default? |
Within first 9 months
Within 6-18 months Last day of the month next year |
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What are minimum CA (2006) requirements?
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P&L, BS and related notes
CA (2006) also requires compliance with UK standards, which also means: CF statement and statement of total recognised gains or losses |
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What are IFRS minimum reporting requirements?
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statement of profit and loss
statement of financial position statement of cash flows statement of changes in equity |
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What needs to go in the directors report?
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names
principal activities of company amount of recommended dividend business review (performance, risks, uncertainties) each director is unaware of relevant info not communicated to auditor taken all necessary steps to get above info |
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What is common additional/optional CA (2006) info?
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average number of employees by category
separate director's remuneration note |
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Name 4 optional reports
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chairman's
csr internal controls corporate governance |
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How long after YE do companies have to file accounts?
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private companies must file accounts with Registrar of Companies after 9 months after year end
public companies after 6 months |
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What does true & fair mean?
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not defined
in UK means compliance with law and accounting standards override to provide substance over form |
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What disclosures do listed companies have to make?
When do they have to be filed? Disclosure Rules and Transparency Rules |
audited financial statements
management report including business review (director's report) statement of director's responsibilities must be audited and published within 4 months |
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3 additional items in annual reports for UK listed companies?
Listing Rules |
Corporate Governance Statement (compliance with governance code)
Directors' Remuneration Report (details on policy, performance conditions, committee, what has been paid, shares held) Going Concern |
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4 additional optional/required reporting documents under Listing Rules or Disclosure Rules and Transparency Rules?
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Summary financial statements (states it's a summary, describe how to get full copy, statement by auditor, qualified/unqualified)
Statement of dividends Preliminary announcement of annual financial report (optional, indicates annual results) Interim reports (IMS, mandatory twice a year, half year financial report mandatory) |
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Name 2 frameworks?
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Statement of Principles (UK)
International Framework for the preparation and presentation of financial statements ('Framework') |
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Who creates UK accounting standards?
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Accounting Council, part of FRC (Financial Reporting Council), advises FRC which then issues standards. FRSs
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4 objectives of IASB?
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Develop single set of high quality, understandable and enforceable global accounting standards
Promote use and application of those standards Encourage convergence of national accounting standards with international standards Take account of financial reporting needs of emerging economies and SMEs |
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3 aims of the Framework?
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Define elements of financial statements
Specify criteria for timing and recognition of these elements Identifying different measurement bases |
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5 users of the Framework?
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Stakeholders (information)
National standard setters (in development of national standards) Auditors (to help form a true & fair opinion under IFRS) Directors (to assist in preparation of financial statements where no accounting standard exists) IASB (to assist in development or modification of standards) |
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2 underlying assumptions in preparation of financial statements?
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Going concern basis
Accruals basis |
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2 fundamental characteristics identified by the Framework?
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Relevance (capable of making a difference to decisions, either predictive or confirmatory)
Faithful representation (complete, neutral, free from error) |
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Definition of materiality?
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If its omission or misstatement could influence decisions taken on the basis of financial statements.
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4 enhancing qualitative characteristics identified by the Framework?
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Comparability
Verifiability (direct - e.g. counting petty cash, indirect - checking inputs to formula) Timeliness Understandability |
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5 elements of financial statements identified by the Framework?
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Assets (a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise)
Liabilities (a present obligation of the enterprise arising from past events, settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits) Equity (the residual interest in the assets of an enterprise after deducting all it liabilities) Income (increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from equity participants) Expenses (decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants) |
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2 criteria for element to be recognised under the Framework?
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Probability
Measure with reliability |
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4 measurement bases?
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Historical cost
Current cost Realisable value Present value |
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Define business process?
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A series of activities that enable a company to meet its objectives.
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Steps of sales cycle?
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1: customer places order (sales order document raised by seller upon receipt of purchase order, sent to warehouse)
2: order is fulfilled and despatched to customer (GDN by warehouse to finance for invoice) 3: customer invoiced for goods (sales invoice raised by finance, sent to buyer) 4: customer pays for goods (remittance advice sent by buyer to seller so payment can be matched to invoice) 4: goods returned (GRN raised by warehouse to finance to prepare credit note) 5: credit note issued to customer (credit note sent to seller) |
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Steps of purchase cycle?
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1: place order (purchase requisition, purchase order)
2: receive goods or services (GRN) 3: receive invoice (purchase invoice) 4: make payment (remittance advice) 5: return goods (GDN) 6: receive credit note (credit note) |
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Steps of payroll cycle?
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1: Work done and time recorded (timesheets)
2: Calculation of payroll liability (HR master file for hourly rate/salary) 3: Payment of payroll liability (Payroll listing/summary and payslips) |
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4 month-end processes?
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Month-end journals (monthly accruals, summary monthly transactions)
Month-end reconciliations (control accounts) Stock counts Management accounts (reconciled to GL) |
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Steps of fixed asset cycle?
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1: identify need for asset (business plan)
2: seek management or board approval (purchase requisition and board minutes/manager authorisation) 3: order asset (purchase order) 4: receive asset (delivery advice) 5: receive invoice/title deeds (invoice) 6: make payment (remittance advice) |
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3 areas internal control systems provide directors with assurance over?
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Reliability of financial reporting
Effectiveness and efficiency of operations Compliance with laws and regulations |
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5 components of a sound internal controls system?
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Control environment (attitude of management)
Risk assessment process Information system (to record transactions) Control activities (policies and procedures) Monitoring of controls |
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5 categories of control activities?
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Authorisation controls
Performance reviews Information processing controls (general IT - passwords, backup, application - stamps/signatures, sequential checks, bank recs) Physical controls Segregation of duties |
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6 limitations of internal control systems?
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Pressure on staff (profit targets)
Collusion (segregation of duties) Human error Abuse of authority (accepting bribes) Lack of training (unusual transactions) Override of controls |
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6 key elements of internal audit function?
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Independent (segregation of duties)
Within the organisation Service to all levels of organisation Measures and evaluates Effectiveness and efficiency of operations and value for money Integral part of business controls |
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2 main objectives of internal audit function?
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Provide reasonable assurance to executive management and board on adequacy and effectiveness of risk management and control systems in company
Assist all members in organisation in discharging their responsibilities |
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Define corporate governance?
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The process by which companies are directed and controlled.
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Define agency risk?
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The risk that the agents' self-interest deviates from that of the principal.
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3 ways corporate governance provides assurance over agency risk?
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Company's dealings with shareholder are fair and transparent
Board of directors is held accountable Company deals responsibly with stakeholders |
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4 main parties and their roles in corporate governance framework?
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Shareholders - appoint external auditor, satisfy themselves that appropriate governance structure is in place
Directors - set company's strategic aims and providing leadership, supervising management, reporting to shareholders on their stewardship External auditor - provide opinion on financial statements that is external and objective Internal auditor - support directors in responsibility for ensuring good governance |
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The Cadbury Report?
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1991, resulted in Code of Best Practice
comply or explain - relating to directors |
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Turnbull report?
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Internal controls
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The Higgs Report?
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2002, wake of Enron
Higgs -> NEDs Sir Robert Smith -> Audit committee |
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5 main headings of UK Governance Code?
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Leadership
Effectiveness Accountability Remuneration Relations with Shareholders |
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4 key roles in Code?
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Executive director - day to day management
Non-executive director - not day to day, challenges strategic decisions, scrutinises performance of executive directors, independent Chairman - independent on appointment, chairs the board and ensures decisions are reached CEO - responsible for executive director team, ultimate responsibility |
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3 committees named in Code?
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Audit (independent NEDs, financial reporting, internal control, internal audit, external auditor relationship)
Nomination (majority of NEDs, nominate new board members) Remuneration (NEDs, set executive director remuneration) |
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2 parts of governance statement required for premium listed companies?
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Narrative statement (how has the company applied Code principles)
Compliance statement (if not, details and explain why) |
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3 requirements under Sarbanes-Oxley?
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Signed by CEO and CFO
Internal controls (management report about effectivness of internal control structure, auditor to comment on management assessment) Audit committees (external audit liaise with audit committee, audit committee has to pre-approve all audit services, info has to be reported to audit committee: auditor independence, critical accounting policies to be used, alternative treatments of financial info within GAAP, accounting disagreements between auditor and management, other relevant communications between auditor and management) |
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3 methods to reduce agency gap?
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Director remuneration (options)
Monitoring director performance Employing external auditor |
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Small company audit exemption criteria?
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Revenue < £6.5m and balance sheet total (gross assets) < £3.26
except, public, bank, e-money, insurance, public sector |
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Small charitable company audit required when...?
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Eng:
gross income >£500k OR gross assets >£3.26m and gross income >£250k. independent examination required where no audit and gross income >£25k Sco: gross income >£500k or gross assets >£3.26m. independent examination required where no audit. |
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Shareholders required to veto audit exemption?
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10%
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4 statements required from audit exempt companies?
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No objection from shareholders
Company is entitled to audit exemption Acknowledging directors' responsiblities to maintain proper accounting records + true and fair Accounts have been prepared following special provisions of CA 2006 for small companies |
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3 key responsibilities of auditor?
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Independent
Express opinion (true and fair, consistency of directors' report with financial statements) Express opinion to shareholders |
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2 key concepts of audit opinion?
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Reasonable assurance (high but not absolute assurance that there are no material misstatements)
Truth and fairness |
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2 methods of managing expectations gap?
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Engagement letter (clarify responsibilities with directors)
Audit report (explains auditor responsibilities, scope of audit, states that it is addressed to shareholders only) |
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2 classes of society expectations of auditor?
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Competence (maintaining professional knowledge and skill, keeping up with developments in practice, legislation and techniques)
Integrity, ethis and independence (straightforward and honest, have principles of proper conduct and system of moral values, completely free and be seen to be free from independence issues) |
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6 Recognised Qualifying Bodies (RQBs)?
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ACCA
AIA (association of international accountants) CIPFA ICAEW CAI ICAS |
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3 requirements to reach 'appropriately qualified' status?
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Entry requirements (university degree or 7 years of practice)
Practical experience (3 years with authorised training firm) Examination structure |
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5 Recognised Supervisory Bodies (RSBs)?
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AAPA (association of authorised public accountants, subsidiary of ACCA)
ACCA ICAEW CAI ICAS |
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2 additional criteria, beyond RSB membership, to obtain statutory auditor status?
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Hold audit qualification
Hold practising certificate (apply to RSB and prove that you have at least 2 years post-qualifying experience with registered auditor, can confirm compliace with CPD bye-laws and have professional indemnity insurance) |
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4 criteria for Audit Registration Committee (ARC) of RSB to grant statutory auditor status?
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Hold audit qualification
Are fit and proper person Hold practising certificate Have professional indemnity insurance |
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5 rules for RSB to retain status?
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Registration and disclosure of auditors (made available, fit and proper persons, professional indemnity insurance)
High standards of audit work (integrity, no conflicts of interest, compliance with ethical standards, CPD) Monitoring of quality (inspections by FRCs Audit Quality Review team) Investigation and discipline Accountability (cost-effective) |
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3 rights of auditor re: information?
CA 2006 |
Right to access books, accounts and vouchers at all times
May require any director, manager or employee to provide info or explanation necessary Obtain from subsidiaries and their auditors such info and explanations as reasonably required |
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3 rights of auditor re: resolutions and meetings?
CA 2006 |
Right to receive copies of all communications relating to any written resolution proposed by private company
Right to receive all notices of any general meeting and to attend Right to be heard at any general meeting on any part of the business of the meeting which concerns him as auditor |
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5 more opinions required of auditor under CA 2006?
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Returns received from branches not visited
Accounts agree with underlying records Proper accounting records have been kept Information and explanations necessary have been received Directors' emolumets and other benefits disclosures are complete RAPID |
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Auditor appointment under normal circumstances + 3 situations where directors appoint?
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Ordinary resolution 50%+
Directors appoint: Any time before first period for appointing auditors To fill a casual vacancy (e.g. if auditor resigned) Following a period during which company did not have auditor, due to exemption, at any time before company's next period for appointing auditors |
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Veto to force private company to vote on auditor re-appointment?
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5%
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4 rights of auditors to protect against unwarranted dismissal?
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Company must send a copy of notice to remove auditor to auditor
Auditor has right to make written representation to shareholders Company must circularise copies of statement, if this is not done auditor has right to read representations at meeting Auditor is entitled to attend general meeting/AGM |
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Procedure of private company to not re-appoint auditor?
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Propose new auditor, send proposed resolution to old and new, outgoing auditor can choose to make written representations to shareholders, if not done resolution is not binding
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Procedure for auditor to resign?
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Send letter of resignation + statement of circumstances to registered office
Client informs Registrar of Companies Auditor may require directors to convene general meeting Written statement to shareholders may be requested |
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Source of statement of circumstances, and content?
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Auditor must send to registered office of company if removed from audit FOR ANY REASON (incl resignation)
Must either assert that no circumstances connected with departure the shareholders and creditors should be aware of, or disclose circumstances |
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Authorities to contact when auditor leaves?
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Auditor notifies FRC for major audit
Auditor notifies RSB for non-major audit If auditor ceases to hold office before end of term, company must notify FRC/RSB all include copy of statement of circumstances |
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3 principal offences under POCA?
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Concealing or transferring proceeds of criminal conduct
Arrangements to facilitate acquisition, retention, use or control of criminal property Acquiring, using or possessing criminal property |
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2 additional POCA offences in regulated sectors?
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Failure to report (knows/suspects, can identify person or property or believes information may assist in identifying, information has come in normal course of business)
Tipping off (disclosures that a report has been or may be made) |
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4 ML policies required of everyone who carries on a relevant financial business in regulated sector?
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Customer due diligence (identify, Companies House, beneficial owners which includes shareholders >25% in listed company)
Record-keeping, procedures and training (MLRO, records for 5 years) Supervision and registration (e.g. professional bodies like ICAS) Enforcement |
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3 additional procedures for auditors required by PN 12?
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MLRO
Reporting suspicions (breach of client confidentiality does not apply if info obtained in normal course of business and reasonable grounds to suspect money laundering and reported to appropriate body) Tipping off (over-auditing, qualified audit report, resigning unexpectedly) |
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Suspicion of money laundering activities outside regulated sectors?
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No mechanism for money laundering report except for terrorism
Report to police |
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3 conditions for auditor to be liable to claimant?
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Auditor owed duty of care to claimant
Audit was performed negligently Claimant suffered quantifiable, reasonably foreseeable loss as a result |
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Re Kingston Cotton Mill Co
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Manager exaggerated stock count to overstate profit
Auditor relied on stock certificate signed by manager, did not do stock count Not expected to at that time Auditor duty: Perform work with skill, care and caution which a reasonably competent, careful and cautious auditor would use |
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AWA Limited v Daniels
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senior managed concealed 50m AUD loss
AWA sued auditor for failure to draw attention to deficiencies in control system and qualify audit reports duty of care existed through engagement letter, negligence due to failure to identify loss, reasonably foreseeable cost auditors jointly liable with directors (who should have implemented controls) |
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Caparo v Dickman and Others (1)
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Caparo relied on Fidelity audited accounts to make takeover
£1.2m profit turned out to be £400k loss Three criteria for duty of care: Reasonably foreseeable loss (yes) Close and direct relationship (no - foreseeable that accounts used for investment decisions but auditors can't be liable) Imposition of duty of care is fair, reasonable and just (no) |
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RBS v Bannerman Jonstone Maclay and Others
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RBS provided overdraft to APC
Contract required APC to send RBS audited accounts When APC failed RBS sued auditor Auditor should have reviewed overdraft conditions This means auditor owed duty of care Settled out of court |
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Caparo v Dickman and Others (2)
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Appealed on grounds that they were shareholders so audit report had been addressed to them
Auditor duty of care is to shareholder body as a whole No duty of care to shareholders acting as individuals |
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3 methods to avoid negligence litigation?
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Formalising basis of engagement contract (agreed and signed by client)
Formal client acceptance procedures (avoid poor ethical or financial records) Ensuring sound audit approach (follow auditing standards, train staff, review work) |
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3 requirements on use of LLA?
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liability limitation agreement
Auditors can only limit liability for a particular financial year Must be authorised by shareholders Details must be disclosed in annual accounts |
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4 options for limiting auditor liability in EU?
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Fixed monetary cap
Cap based on size of audited company Cap based on multiple of audit fees Proportionate liability matched to responsibility |
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5 fundamental principles of ICAS code of ethics?
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Integrity (straightforward and honest)
Objectivity (no bias, conflict of interest, undue influence) Professional competence and due care (mantain professional knowledge and skill) Confidentiality (only when legal/professional duty, not for personal advantage) Professional behaviour (comply with laws and regulations, not discredit profession) |
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Define independence?
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Freedom from situations and relationships which make it probable that a reasonable and informed third party would conclude that objectivity either is or could be impaired
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2 ways to overcome public scepticisim about auditor independence?
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Evidence that standards have been established for auditor conduct
The standards are properly enforced by profession or society |
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5 Ethical Standards by FRC?
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ES 1 - Integrity, objectivity and independence
ES 2 - Financial, business, employment and personal relationships ES 3 - Long association with the audit engagement ES 4 - Fees, remuneration and evaluation policies, litigation, gifts and hospitality ES 5 - Non-audit services provided to audited entities |
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6 threats under ES 1?
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Self-interest (investment in client, needs to recover fee, excessively dependent on client)
Self-review (where auditor mantains accounting records, has done asset valuations, auditing controls that he suggested) Management (auditor is involved in implementing info systems, executive recruitment services) Advocacy (negotiating tax, legal services, evidence at court) Familiarity (personal relationship, family relationship with senior staff) Intimidation (aggressive individual, replacement threat, pressure to reduce work to reduce fee) |
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3 additional requirements under ES 1?
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Ethics partner (responsible for policies and procedures for Ethical Standards and communicating them)
Continued Awareness (senior auditors must be aware of threats to independence throughout engagement) Communication with Those Charged with Governance (communicate all facts impacting on objectivity and independence, document in audit file) |
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6 ethical situations discussed in ES 2?
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Financial interest (self-interest, no exceptions for direct holdings)
Loans and guarantees (ok if client is bank, normal course of business and loan is immaterial) Business relationships (ok if at an arm's length and immaterial) Audit staff on loan to the audit client (shouldn't audit that area for at least one year) Audit staff leaving to join the audit client (auditor should resign if engagement partner or Quality Control Reviewer joins client, two year wait is acceptable) Family members employed by audit client (spouse is unacceptable, parents, non-dependent children and siblings can be ok) |
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Safeguards for ES 3?
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Consider rotating audit partner after 10 years
or Involving additional new partner, or applying independent quality reviews Not removing individual requires documentation explaining decision Listed companies: Rotate engagement partner after 5 years (with 5 year wait) QC reviewer rotated after 7 years (with 5 year wait) Other key partner rotated after 7 years (2 year wait) Independence of other audit staff seriously considered after 7 years |
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Safeguards for ES 4?
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Contingent fees are so significant that there are none
Overdue audit fees should be received before accepting appointment (unless trivial) Dependence on one client, if total fees exceed 10% (listed) or 15% (non-listed) then auditor should resign If litigation ongoing or probable, auditor should resign or not accept Only accept clearly insignificant gifts. |
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Safeguards for ES 5?
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Limit to amount of of non-audit work auditor can perform before self-review or management
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5 independence areas affected by SOX?
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Prohibition of non-audit services (generally prohibited as opposed to UK listed)
Pre-approval of services (by audit committee) Audit partner rotation (engagement, lead and other key partners every 5 years) Conflicts of interest (if CEO, CFO or CAO were employed by auditor in last year audit is prohibited) Declarations of relationships (auditor makes financial reporting oversight role relationship declaration to audit committee, and discuss effects of relationships with audit committee) |
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6 strategic outcomes of FRC?
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Conduct Oversight (enforce use of accounting standards)
Governance and Stewardship (review Corporate Governance Code and recommend updates to make corporate reports more useful) Corporate Reporting (ensure corporate reports are relevant to needs of investors) Audit Quality and Value (financial crisis, understanding public expectation, audit firm failure contingency) Actuarial Oversight Economic and Market Context (understand and react to trends in economy, capital markets and understand investors) |
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FRC structure?
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FRC Board
Codes & Standards Committee (Accounting Council, Audit & Assurance Council, Actuarial Council) Executive Committee Conduct Committee (Monitoring Committee - > Financial Reporting Review Panel, Case Management Committee -> Tribunal) |
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5 responsibilities of FRC Board?
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Setting and amending UK accounting, auditing and actuarial standards
Maintaining effectiveness of UK Corporate Governance Code Maintaining effectiveness of UK Stewardship Code Setting annual business plan of FRC Overseeing effectiveness of executive committee |
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5 elements of audit process?
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AUDIT PROCESS STAGES
Planning Systems and controls analysis Substantive and completion ONGOING ELEMENTS Risk assessment Engagement and client management |
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2 considerations when considering acceptance/continuance, and their 2 respective categories?
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Commercial considerations (financial and reputational)
Professional requirements (ethical and legal) |
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7 main procedures during acceptance?
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Identify users and nature of engagement
Assess client's legal and financial stability Assess integrity of those carged with governance, management and the principal owners Communicate with previous auditor Evaluate firm's ability to audit - practically and ethically Client identification Agree basis for performance |
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Purpose of engagement letter?
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Acts as a contract, protects both parties and reduces risk of misunderstandings
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7 points required in engagement letter?
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Auditor acceptance confirmation
Summary of respective responsibilities Scope of audit Form of any reports to be issued Outline of impact of the test nature and inherent limitations of audit, including limitations of internal control Expectation of unrestricted access to records Whether financial reporting framework to be applied in preparation of financial statements is acceptable |
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3 acknowledgements auditors need from management in relation to engagement letter?
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Management understands its responsibility for:
Preparing accurate financial statements Ensuring proper internal controls are in place Providing auditor with access to all records and providing any explanations necessary |
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3 situations where it is appropriate to reissue engagement letter under ISA 210?
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Client appears to have misunderstood objective or scope of audit
Significant changes in board of directors Significant change in nature of client's business |
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4 underlying fundamental concepts relating to practical process of auditing?
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Materiality
Risk Evidence Audit judgement |
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When is something material?
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When its omission or misstatement would reasonably influence the economic decisions of shareholders on the basis of the financial statements
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What is audit risk? (not the equation)
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The risk that the auditor gives the wrong opinion.
(i.e. miss a material misstatement) Higher risk = need to do more audit work |
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3 ways in which auditor gathers evidence?
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Understanding the business (planning stage)
Testing the controls (systems and controls stage) Testing the numbers (substantive testing) |
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What are the benefits of a risk based approach, in terms of conflicting objectives?
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Provides highest quality evidence in a given time or for a given fee
and Ensures sufficient and appropriate evidence is collected on which audit opinion can be based |
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What is the audit risk equation?
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AR = Inherent risk x Control risk x Detection risk
IR: susceptibility of a financial statement account to material misstatement, irrespective of internal controls CR: risk that client's controls will not prevent or detect material misstatement on a timely basis DR: risk that auditor's procedures will not detect material misstatement that exists in financial statements |
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2 types of Inherent Risk and examples?
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Financial statement level (going concern, integrity of management)
Account specific (complex accounting transactions/policies, susceptibility of assets to misappropriation) |
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2 components of Detection Risk?
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Sampling risk (material misstatements not picked as part of sample, sampling risk reduced by increasing sample size)
Non-sampling risk (incorrect judgement, inappropriate audit procedures or results interpreted incorrectly) |
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4 ways planning for an audit allow the auditor to achieve ability to express opinion?
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Ensuring appropriate and sufficient attention directed to important areas
Ensuring potential problems are identified and resolved Ensuring work is completed effectively and efficiently Facilitating direction, supervision and review of audit |
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4 key areas of detailed audit plan?
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Risk assessment procedures
Assessing materiality Fraud Engagement and client management procedures |
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6 aspects of entity required to be understood under ISA 315?
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Industry, regulatory and other external factors
Nature of the entity Objectives and strategies and related business risks Measurement and review of entity's financial performance Appropriateness of accounting policies Internal control |
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4 risk assessment techniques under ISA 315?
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Enquiry
Inspection Observation Analytical procedures |
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4 steps of analytical procedure?
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Form expectation
Compare to actual Investigate and substantiate Conclude |
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5 analytical procedure techniques?
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PLANNING
Comparison (PY, budget, industry) Ratio analysis SUBSTANTIVE TESTING Reasonableness test Trend analysis Large and unusual items review |
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3 types of materiality?
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Overall materiality (what is significant to financial statements as a whole)
Performance materiality (less than overall, so that probability that uncorrected/undetected misstatements exceed overall materiality is low) Reporting/Final materiality (overall materiality re-calculated at completion stage based on final financial statements) |
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3 examples of materiality bases?
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1% of turnover
5% of PBIT 2% of total assets |
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2 types of fraud?
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Fraudulent financial reporting (management)
Misappropriation of assets (employees) |
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3 fraud risk factors?
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Incentives/pressures
Opportunities Rationalisations/attitudes |
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3 key elements of engagement and client management procedures?
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Firm/engagement staff management procedures (adequate recruitment, performance evaluation and training procedures, engagement partner)
Working paper management (evidence that audit has been completed must be documented, documentation of all audit work and material matters, qualified auditor should be able to reach same opinion, all work must be reviewed) Communication within audit team and with client (audit strategy memorandum which summarises key decisions made during planning, results of risk assessment, audit strategy, materiality and admin details) |
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An additional review requirement for listed company engagements?
(relating to engagement and client management) |
Separate 'engagement quality control reviewer' (EQCR) appointed for each listed company audit, independent of audit (the day to day work) to provide objective assessment
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6 tasks in systems and controls analysis stage?
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Processes, systems and controls - understanding and documentation
Walkthrough of systems Evaluation of control design Tests of controls Re-assessing risks Production of audit programmes in response to risk |
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5 steps of assessing information systems?
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Identifying critical information systems (planning)
Understanding critical information systems (systems & controls analysis) Documenting critical information systems (systems & controls analysis) Updating risk assessment (systems & controls analysis) Performing walkthrough (systems & controls analysis) |
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3 steps to determine whether a control can be relied on?
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Identify key controls (auditor intends to rely on it)
Assess design Test whether control operated |
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4 tests of control techniques?
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Enquiry
Inspection Observation Re-performance |
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3 approaches to audit?
(in terms of controls) |
Controls reliance (well designed and tested to prove they have been operating, low level of control risk)
Partial controls reliance (is there compensating control? substantive testing higher for weaker controls areas, reported to client via management letter) No controls reliance (designed ineffectively or not operating correctly, high control risk, high substantive testing, communicated via management letter) |
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Audit assertions?
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BALANCES
Completeness Existence Rights & Obligations Valuation & Allocation TRANSACTIONS Completeness Occurrence Cut-off Accuracy Classification PRESENTATION & DISCLOSURE Completeness Occurence (and Rights & Obligations) Classification & Understandability Accuracy & Valuation |
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Purpose of audit assertions?
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Clearer definition of audit aims
Clearer demonstration of work done Audit needs to be done AND seen to be done |
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ISA 500: sufficient and appropriate evidence - means?
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sufficiency - quantity of evidence
appropriateness - relevance (assertions) and reliability (source and nature) of evidence |
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3 sources of evidence?
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Auditor generated
Third party/externally generated Client generated |
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Principle of synergy?
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Where evidence from two independent sources is consistent, the sum of assurance gained by auditor is greater than the sum of individual parts.
Continued evidence from same source will have diminishing marginal benefit |
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3 categories of evidence?
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Natural evidence (physically witnessed event or asset)
Created evidence (documented) Rational argument (logic, reasonableness) |
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3 means to select items for testing?
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Entire population
Specific items (target testing) Audit sampling Depends on characteristics of population, ROMM and audit efficicency |
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2 sampling methods?
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Statistical sampling (probability theory, each item has equal chance of being selected)
Non-statistical sampling (auditor judgement, but still random) |
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8 evidence collection techniques?
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TESTS OF CONTROLS
Enquiry Inspection Observation Re-performance SUBSTANTIVE TESTS Enquiry Inspection Inspection of assets Third party confirmation Recalculation Analytical procedures |
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Difference between substantive analytical procedures and tests of details?
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Testing the total population
v Selecting specific items within population for testing |
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Why would analytical procedures be used as a substantive test?
(considering it's optional) |
If results of analytical procedures as substantive test are satisfactory, they can reduce amount of tests of details that have to be performed. This is why substantive analytical review is done at start of substantive testing stage.
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What assertions do analytical procedures cover?
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All transactions (COCA-V) and all balances (but not R&O)
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5 types of substantive analytical procedures?
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PLANNING
Comparison Ratio analysis SUBSTANTIVE TESTING Reasonableness test Trend analysis Large and unusual items review |
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3 main steps of substantive testing?
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Reconcile FS to TB
Reconcile TB to sub-ledgers Test sub-ledgers (tests of detail) |
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4 steps in bank reconciliation testing?
What assertions are covered? |
Agree bank balance to bank statement and bank letter
Agree cash book balance to nominal ledger Cast the reconciliation Obtain supporting evidence for a sample of reconciling items All balance sheet assertions |
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4 assertions covered by bank recs, their issues and how they can be tested?
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Existence - do cash balances exist, are they recorded in the correct period (bank letter, significant cash balances should be counted, review of bank rec for recording in correct period)
Completeness - are all accounts included in accounts (review of bank letter, review of bank rec) Rights and obligations - do all balances relate to company (bank letter) Valuation and allocation - FX, all accounts reconciled correctly, bank overdrafts netted off (independent exchange rate verification, auditor performing rec, auditor checking that only accounts in the same bank netted off) |
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Example of a way to substantive test the sales ledger (debtors)?
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Debtors circularisation - requesting confirmation of balance they owe at year end
(Existence, Rights & Obligations, little evidence over Valuation and Allocation) |
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2 main areas of auditing stock?
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Auditing quantity (stock count on smaller engagements for C/E, cut-off testing for C/E)
Auditing value (stock provision V&A, NRV, analytics for stock days) |
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3 ways to test creditors?
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Creditor circularisations (C, E, V, O)
Supplier statement reconciliations (C, E, V, O) Analytical procedures (creditor days E/C/V) |
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What assertions does cut-off testing cover?
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Cut-off on income statement
Completeness and existence on balance sheet |
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4 cut-off testing scenarios relating to GRN/GDNs and the implications to Purchases/Creditors/Stock and Sales/Debtors/Stock, respectively?
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GRN before year end
Included in: Purchases (Y) Creditors (Y) Stock (Y) GRN after year end Included in: Purchases (N) Creditors (N) Stock (N) GDN before year end Included in Sales (Y) Debtors (Y) Stock (N) GDN after year end Included in: Sales (N) Debtors (N) Stock (Y) |
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5 assertions to cover in purchases and other expenses, issues and tests?
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Completeness - have all goods received before year end been included in purchases and creditors (sample of payments from cash book to expense analysis)
Occurrence - have any private purchases been made through company (verify sample of invoices to ensure addressed to company) Cut-off - have all expenses been recorded in correct accounting period (cut-off testing) Accuracy - lease interest calculated in line with standards, depreciation with accounting policy, VAT excluded from purchases (review calculated expenses for compliance and arithmetical accuracy) Classification - have all expenses been recorded in correct nominal ledger code (check classification by selecting sample of invoices, analytical procedures) |
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Examples of items covered by completing disclosure assertion checklist?
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Cost and aggregate depreciation for fixed assets
Property revaluation, basis, date and valuer Stock valuation and categorisation Debtor classification including older than 1 year Bank overdrafts netted off and the right to net off Director's remuneration Audit fees disclosed |
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2 uses for reporting materiality at the completion stage?
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Evaluating whether sufficient appropriate evidence has been gathered (over material items specifically)
Evaluating the effect of misstatements identified by auditor |
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Responsibilities relating to going concern under ISA 570?
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Directors prepare financial statements and therefore make a going concern assessment
Auditor evaluates director's assessment throughout audit process and immediately prior to signing audit report |
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3 going concern alternatives?
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Going concern principle applied correctly (true and fair)
Going concern principle applied incorrectly (not true and fair) Going concern status is uncertain (disclose in FS) |
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Analytical procedures during completion are...?
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Compulsory!
Results of analytical review should be supported by evidence gathered during audit and results should be cross-referenced. |
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ISA 560 responsibilities regarding subsequent events?
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Directors to perform subsequent events review
Auditors required to ensure this has been done |
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Auditor responsibilities before signing audit report?
(concerning whether all events up to the date of the audit report that may require adjustment or disclosure in FS have been identified) |
Review minutes of shareholder and board meetings
Review post year-end management accounts Request details of pending litigation from the company lawyers |
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Auditor requirements regarding written representations under ISA 580?
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Auditor to obtain evidence that those charged with governance acknowledge their responsibility for preparation of FS and that they have approved them
Auditor to obtain written representations from management in relation to matters material to the FS when other sufficient appropriate audit evidence cannot reasonably be expected to exist |
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Timing and content of management written representation?
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Dated on date of audit report, obtained before audit report is signed
Contains clarification of management's responsibilities in relation to FS (preparation and approval, design and implementation of internal controls, making all records available to auditor) Contains matters specific to the set of FS under review and the audit of those FS (going concern, fraud, breach of law or regulations) Contains |
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2 engagement and client management procedures to be undertaken during completion phase?
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Review of working papers (sufficient appropriate evidence obtained, judgements and conclusions are appropriate, requirements of law and standards have been fulfilled)
Communication (responsibilities, matters and concerns discussed within audit team, auditor MUST inform client in writing about qualitative aspects of accounting practices, significant difficulties encountered, audit matters discussed with management, any other relevant matters, any deficiencies in internal control) |
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Additional review procedure for listed companies?
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Appointment of Quality Control Reviewer (partner with no involvement in audit, aka independent partner review)
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10 elements required in every audit report under ISA 700?
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Title
Addressee Introductory paragraph Respective responsibilities of those charged with governance and auditors Scope of audit Opinion on financial statements Opinion on other matters Date of audit report Location of auditor's office Auditor's signature |
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CA 2006 terminology for audit opinion?
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Unqualified (true and fair, complies with applicable accounting standards and company law)
Qualified (not true and fair OR insufficient evidence) |
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ISA 700 terminology for audit opinion?
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Unmodified
Modified (Qualified, Adverse, Disclaimer of opinion) |
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What makes something pervasive?
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'Term used to describe the effects on the financial statements of misstatements'
Affects many items in FS and/or has significant impact on truth and fairness of FS as a whole |
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What should auditor do in modified audit reports?
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Reasons for modification
Quantify effect, if possible Mention non-compliance with statute where appropriate (e.g. proper accounting records have not been kept) |
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When should an emphasis of matter paragraph be included in audit report?
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If matter is fundamental to users' understanding of the FS and is properly disclosed in the FS (if not then FS do not show true and fair view and modified opinion should be issued)
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Extended reporting requirements for auditors of UK Listed Companies?
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Directors' remuneration report (audit figures)
Corporate Governance statements (not the narrative, but 9/53 provisions which cover roles of auditors internal/external, internal control, audit committee |
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Extended reporting requirements for auditors of US Listed Companies (SOX)?
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Management must issue a statement assessing the effectiveness of internal control, specific weaknesses and management's approach to addressing these
Auditor must attest to statement made by directors and provide an opinion on whether company maintained effective internal controls over financial reporting |
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Contents of management letter?
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Missing control activities (during documentation of business processes and controls)
Control weaknesses (during tests of controls) Issue/implication/recommendations |
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Are summary financial statements audited?
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No - just checked for consistency with full annual financial report
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5 responsibilities of Conduct Committee?
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Monitoring RSBs and RQBs
Audit Quality Reviews (FRC through Professional Oversight Team and FRC's Audit Quality Review Team (AQRT) and also RSBs) Corporate reporting reviews (checking directors' reports and accounts of public/large private companies for compliance with law, done by Financial Reporting Review Panel (FRRP)) Professional discipline Oversight of the regulation of accountants and actuaries |
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3 stage process for setting FRS?
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Production of Discussion Paper
Production of Financial Reporting Exposure Draft (FRED) Production of FRS FREDs are not mandatory until they become FRS |
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What is FRSSE?
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Financial Reporting Standard for Smaller Entities
Simplified and modified FRSs and Abstracts (which are clarification points) to fit smaller entities Disclosure and presentation requirements are reduced |
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2 barriers to global adoption of IFRS?
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Difference between US GAAP and international standards (convergence is being worked on)
Concern that international standards are overly onerous to small businesses (IASB has produced IFRS for SMEs) |
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3 stages of producing IFRS?
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Production of Discussion Paper (optional)
Production of Exposure Draft Production of IFRS (board approval) |
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3 ways FRC is following IFRS convergence policy?
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Adopting new IFRSs that cover areas where there is no FRS
Completely replacing existing standards with IFRS equivalent Amending existing FRS to bring them in line with IFRS |
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SIRs?
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Standards for Investment Reporting
Produced by FRC What accountants have to comply to when conducting an engagement related to a prospectus, listing particular, circular to shareholders etc |
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How are UK ISAs enforced?
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Not directly, but all RSBs require statutory auditors to follow auditing standards set by FRC
Non-compliance means statutory auditor status can be revoked |
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Outcomes of FRRP enquiry process?
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Satisfactory accounting treatment - no action, enquiry remains confidential
Unsatisfactory - FRRP persuades directors to take remedial action (withdraw and revise accounts) Director voluntary action - FRRP issues press notice to public only Director refusal - FRRP can apply for court order OR inform FSA |
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Who oversees auditors for professional discipline?
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FRC through Conduct Committee
RSBs |
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FRC professional discipline process?
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Decide to investigate
Investigate Decide whether to bring disciplinary proceedings Referral to Disciplinary Tribunal Tribunal hearing Appeals process via Appeals Tribunal |
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RSB professional discipline process?
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Conciliation attempt
Investigate case Disciplinary proceedings by Disciplinary Tribunal Appeals processs via Appeals Tribunal |
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Process for developing IAASB ISAs?
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Research and consultation
Transparent debate Exposure for public comment (circulated + website, 120 days) Consideration of comments received on exposure (if changes are major IAASB may consider re-exposure) Affirmative approval (2/3 votes) |
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Typical content of ASM?
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Audit Strategy Memorandum
Background client information Systems and controls information Staffing and key client contacts Materiality Analytical procedures results Risk assessment findings and procedures planned in response Timetable Internal document - not given to audit client |
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Other pronouncements by the FRC
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Ethical standards (ES)
Practice notes and bulletins (practice notes provide guidance on specific circumstances or industries, bulletins provide guidance on new or emerging issues - both are persuasive) International Standards of Quality Control (UK & Ireland) (ISQC) (firm/engagement staff management procedures) International Standards on Review Engagements (ISRE) (half-yearly reports) Standards for Investment Reporting (SIR) (prospectuses) |
