F8 Flash Cards

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.

The planning stage; as a source of audit evidence (substantive test); at the final review stage.

Auditor’s Responsibility
… we … plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

(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

* The control environment
* Risk assessment process
* Control activities
* Information system
* Monitoring controls

True: the information is factual and conforms with reality.

The nomination committee

As more items are examined in the sample, sampling risk decreases.

Corporate governance: the system by which companies are directed and controlled

Analytical procedures and tests of detail

The roles of Chief Executive Officer and Chairman should be split.

A self-interest threat because the auditor wants the share price to rise.

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

* 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

A self-interest threat because the auditor is anxious to be paid.

A contingent liability is a possible liability arising from past events…. existence confirmed by future events

The audit assertions relating to presentation and disclosure are:
* Occurrence
* Rights and obligations
* Completeness
* Classification and understandability
* Accuracy
* Valuation

The International Standards on Auditing are set by International Auditing and Assurance Standards Board (IAASB) – part of the International Federation of Accountants (IFAC)

A management threat.

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.

* Previous years’ ratios,

* Budget ratios,

* Industry standard ratios

Disclaimer of opinion

The asset beta measures the risk of the business itself, ignoring the effect of any gearing in the business.
The equity beta measures the risk of a share in the business (including the risk resulting from any gearing).

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.

½ – 1% of revenue
1 – 2% of total assets
5 – 10% of profit before tax

An audit is the independent examination of, and expression of opinion on, the financial statements of an entity.

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.

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.

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.

A self-review threat.

This is correct and is the normal position for closing inventory.

Analytical procedures, enquiry, confirmation, inspection, observation, recalculation and reperformance

Where knowledge is confined to management
Reliance on the judgement/opinion of the directors

False. An emphasis of matter paragraph does not cause a modified opinion nor does it cause the FS to be qualified.

Decline the appointment

A NED is a non-executive director

The operation of the client’s computer programs.

These processes are usually carried out at the interim audit stage

* Human error
* Collusion
* Bypass of controls
* Costs of control > benefits
* Non-routine transactions for which no system has been developed.

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.

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

False. Internal audit is encouraged and the need for it has to be kept under review, but it is not mandatory.

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).

An emphasis of matter paragraph

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.

Accuracy
Completeness
Cut off
Allocation
Classification and understandability
Occurrence 
Valuation
Existence
Rights & obligations (ownership)

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.

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.

Adverse opinion

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

Leadership
Effectiveness
Accountability
Remuneration
Relations with shareholders

The third parties should be: qualified, experienced, independent and professional

The audit assertions relating to year end balances are:
* Existence
* Rights and obligations
* Completeness
* Valuation
* Allocation

Positive: where everyone should reply whether or not the balance is in agreement.
Negative: where only those disagreeing with the balance should reply.

The risk, that because the auditor is relying on a sample, conclusions drawn about the population are wrong.

* Narrative notes,
* Flowcharts,
* Questionnaires (ICQs and ICEQs).

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.

Inherent risk, control risk and detection risk

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.

Substantive tests

NEDS not less than 50% of board; not less than 2 in small companies

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).

A negative assurance

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

The audit committee.

External is better than entity’s records
Auditor direct is better than indirect evidence
Written is better than oral

ACCA suggest that the lead partner should be changed at least every 5 years.

• Integrity
• Professional competence and due care
• Confidentiality
• Professional behaviour
• Objectivity

The auditor must examine the expert’s work with respect to: consistency with other evidence, assumptions made, use and accuracy of source data.

Computer audit programmes examine client data.

Inherent risk and control risk

* Self-interest
* Self-review
* Familiarity
* Advocacy
* Intimidation
* Management

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.

Sampling risk and non-sampling risk.

A familiarity threat

15% for ordinary; 10% for special interest.

The nature of the weakness, the possible consequence of the weakness, how to fix the weakness.

The audit assertions relating to transactions are:
* Occurrence
* Completeness
* Accuracy
* Cut off
* Classification

The remuneration committee

Listed companies are expected to comply with the corporate governance code or, if they don’t, explain why not.

ISA 315, Audit evidence divides assertions into

* Transactions and events
* Account balances
* Presentation and disclosure

Fundamental ethical principles, threats to those and safeguards against the threats.

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.

A matter is material if it omission or misstatement would reasonably influence the economic decisions users.

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.

* Random selection,
* Systematic selection,
* Haphazard selection,
* Sequence/block selection,
* Monetary unit sampling,
* Stratified sampling.

An unmodified report (if a matter is not material, a ‘clean’ audit report can be issued)

The audit report will be qualified because the financial statements contain a material misstatement by not disclosing the going concern problem.

Disclose but do not make a provision.

A positive assurance

No disclosure; no provision.

Sufficient appropriate

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

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.

Audit risk is the risk that an inappropriate audit opinion is given.

An adjusting event is one which provided evidence of conditions that existed at the date of the statement of financial position.

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.

A non-adjusting event is one that relates to conditions that arose after the date of the statement of financial position.

12 months

• 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