ACCA AA Flashcards

Audit evidence – information used by the auditor in arriving at the conclusions on which the audit opinion is based. It includes information contained in the accounting records underlying the financial statements and information from other sources.

See chapter 6

Substantive procedure – an audit procedure designed to detect material misstatements at the assertion level.

See chapter 8

1. Fraudulent financial reporting
2. Misappropriation of assets

Control risk is the risk that an inherent risk will not be prevented, or detected and corrected, on a timely basis by internal control.

Internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations.

Advocacy threats arise when a professional accountant promotes a client’s position or opinion to the extent that subsequent objectivity may be compromised.

The reliability of audit evidence is influenced by its source and nature.  Generally, reliability is increased when audit evidence is:

• Obtained from a third party, rather than an internal source
• Obtained directly by the auditor
• Documented, rather than oral
  ? Original, rather than a copy

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.

< ½% is not material – > 1% of revenue is material
< 1% is not material  –  > 2% of total assets is material
< 5% is not material – > 10% of profit before tax is material

Between these thresholds requires the exercise of professional judgment.

Analytical procedures must be used at the planning and final review stages.

Substantive analytical procedures to obtain audit evidence are not a requirement.

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

Self-review threat – for example, in taking responsibility for the financial statements or the design of internal controls.

Self-interest threat – for example, in the fees for providing non-audit services.

Familiarity threat – because the firm becomes too closely aligned with management’s views and interest.

Note: “Management threat” is not a classification in the Code.

A familiarity threat

A self-interest threat because the auditor would have a direct financial interest.

A self-review threat.

A self-interest threat because overdue fees may be regarded as equivalent to a loan (i.e. a direct financial interest).

Identify threats to compliance with the fundamental principles.

Evaluated the significance of the threats identified.

Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level.

To Those Charged with Governance – i.e. the audit committee.

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

An unmodified opinion. An audit opinion can only be modified in respect of a matter that is material to the financial statements.

Disclaimer of opinion

Adverse opinion

True. The inclusion of an EoM in the auditor’s report does not affect the audit opinion.

An emphasis of matter paragraph

1 The financial statements are not free from material misstatement.
2 The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements are free from material misstatement.

Auditor’s Responsibility for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement.

An auditor would refer to the directors’ report in the auditor’s report if, for example, it contradicted the financial statements.  Assuming the misstatement is in the directors’s report (not the financial statements), the matter will be drawn to the reader’s attention in an “other information” paragraph.

* Statement of financial position (“balance sheet”)
* Statement of profit or loss and other comprehensive income (“income statement”)
* Statement of changes in equity
* Cash flow statement
* Notes to the above, including significant accounting policies

That management and those charged with governance have:

• Properly prepared and presented the financial statements
• Provided complete information to the auditor and all recorded transactions have been reflected in the financial statements.

The audit opinion will be modified with a qualified opinion “except for” the omission of the disclosure (i.e. misstatement in the financial statements).

The audit opinion will be UNmodified.

(The report should contain a Material Uncertainty Relating to Going Concern section drawing users’ attention to the accounting policy note relating to going concern.)

12 months (minimum)

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

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

No disclosure; no provision.

Disclose unless likelihood is “remote”.

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

Yes

Cut-off is incorrect. There is no liability until the goods are received. The invoice amount should not be included in purchases for the year/trade payables at the reporting date.

Goods must be included in inventory and the liability recognised (i.e. Dr Purchases/Cr “Goods received not invoiced” accrual.

Positive – everyone is asked to respond.
Negative – respond only in the event of disagreement (i.e. with the given balance).

These assertions relate to the period under audit:
* Occurrence
* Completeness
* Accuracy
* Cut-off
* Classification
* Presentation

These assertions relate to year-end balances:
* Existence
* Rights and obligations
* Completeness
* Accuracy, valuation and allocation
* Classification
* Presentation

Assertions are the implicit and explicit representations made by management about the elements of financial statements and related disclosures.

Cut-off means that transactions and events have been recorded in the correct accounting period to which they relate.

(a) To those charged with governance. By definition “significant deficiencies” are those that merit the attention of TCWG

(b) To appropriate level of management.

Inspection e.g. of initials/signatures on documents
Observation e.g. watching goods received being counted
Re-performance e.g. reperforming a bank reconciliation to ensure that it was properly carried out.

Remember: Enquiry alone is not sufficient to test operating effectiveness

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 control environment includes:

* governance and management functions
* the attitude, awareness and actions of management

Control activities are the policies and procedures which help ensure that:
? management directives are carried out
? actions are taken to address risks that threaten the achievement of the entity’s objectives

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

The nature of the weakness/what the problem is

The implications or possible consequences of the weakness

Recommendations how to fix the weakness.

* Cost v benefit
* Human error
* Collusion
* Management override (bypass)
* Non-routine transactions

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.

General controls – over the development, prevention of unauthorised changes etc, backup.

Application controls – over the initiation, recording, processing and recording transactions.

* The control environment
* Risk assessment process
* Control activities
* Information systems
* Monitoring process

Tests of control would not be carried out if:
Controls do not exist or are not expected to operate effectively, or
There are relatively few transactions such that substantive procedures alone is the more efficient audit approach.

The auditor must evaluate the adequacy of the expert’s work with respect to:

* Consistency with other evidence
* Assumptions made
* Use and accuracy of source data.

Internal audit must be objective, competent and apply a systematic and disciplined approach to planning, performing and documenting its
activities, including quality control.

An expert has expertise in a field other than accounting or auditing:
* Management’s expert – assists management in preparing the financial statements.
* Auditor’s expert – assists the auditor in obtaining sufficient appropriate audit evidence. May be internal or external to the audit firm.

Test data is a computer-assisted audit technique (CAAT) used to investigate the operations of client programs.

Audit software (also called audit program) is a computer-assisted audit technique (CAAT) used to examine and interrogate clients’ accounting data.

Non-sampling risk does not depend on sample size. This risk is affected by the experience and ability of the auditor, supervision and planning.

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

* Random selection
* Systematic (interval) selection
* Haphazard selection,
* Block selection
* Stratification
* Value weighted selection (e.g. as used in monetary unit sampling)

Analytical procedures
Enquiry and confirmation
Inspection
Observation
Recalculation and reperformance

Recalculation is a check of mathematical accuracy of documents or records – i.e. a substantive procedure.

Reperformance is the auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal controls – i.e. a test of control.

Existence
Rights and obligations
Completeness
Accuracy, valuation and allocation
Classification
Presentation

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).

Managers, not auditors, are responsible for the prevention or detection of fraud.

However, auditors are expected (with reasonable assurance) to find material misstatements, whether due to fraud or error.

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 financial statement materiality. This is performance materiality.

Misstatements, including omissions, are consider material if, individually or in aggregate, they could reasonably be expected influence the economic decisions users taken on the basis of the financial statements.

An interim audit takes places during the reporting period, before the date of the financial statements; the final audit starts around or after the reporting date (typically a year end).

The overall audit strategy sets the scope, timing and direction of the audit. It helps guide the development of the more detailed audit plan.

* Previous years’ ratios

* Budget ratios

* Industry standard ratios

See chapter 10

Tests of details (of classes of transactions, account balances and disclosures)
Substantive analytical procedures

This risk that arises when audit procedures are applied to samples rather than entire populations.

The auditor may conclude, based on only a sample, that controls are more effective than they actually are or that there is no material misstatement when, in fact, there is.

Sampling risk and non-sampling risk.

Inherent risk

Control risk

Inherent risk
Control risk
Detection risk

Decline the appointment

The total fees from a PIE client should not exceed 15% of the firm’s total fees for two consecutive years.

The threat that due to a long or close relationship with a client, the auditor will be too sympathetic to their interests or too accepting of their work.

Seven years

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

Shareholders own the company and are its principles.  Directors run the company and are the agents of the shareholders. The agency problem arises if directors do not act in the best interests of the shareholders, but for themselves (e.g. excessive executive remuneration).

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

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

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

Nomination committee

Remuneration committee

Board Leadership and Company Purpose
Division of Responsibilities
Composition, Succession and Evaluation
Audit, Risk and Internal Control
Remuneration

? Monitor the integrity of the financial statements
? Review internal financial controls and risk management systems
? Monitor and review the effectiveness of internal audit
? Make recommendations concerning the external auditor (appointment, remuneration, etc)
? Implement policy for engaging the external auditor to supply non-audit services
(Only three asked for)

Listed companies are expected to comply with the corporate governance code and state that they have done so or, if they have not, to explain why not.

Every company should be headed by an effective board which is collectively responsible for the long-term success of the company.
All directors must act with integrity, lead by example and promote the desired culture.

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.

International Standards on Auditing are set by the International Auditing and Assurance Standards Board (IAASB) – a board of the International Federation of Accountants (IFAC).

There is a limitation on the scope of the practitioner’s work.
The assertion is not fairly stated or the subject matter information is materially misstated.

Negative assurance (also known as limited assurance)

Positive assurance (also known as reasonable assurance)