ACCA AAA Flashcards

Common controls are controls designed by group management that are intended to operate in a common manner across multiple entities or business units.

See chapter 21

True

See chapter 21

A component auditor is an auditor who performs audit work related to a component for purposes of the group audit

See chapter 21

Applicable financial reporting framework – the financial reporting framework adopted by management in the preparation of the financial statements that is acceptable in view of the nature of the entity and the objective of the financial statements or that is required by law or regulation.

See chapter 14

• Improvement – performance information helps identify wastage (for example).
• Monitoring – how well has the government department/agency performed against targets?
• Reporting – the department/agency is accountable to government and taxpayers (who provide funding) and the users of the service.

See chapter 31

• Economy – the cost of drugs for a specific medical condition.
• Efficiency – the number of patients attended to in a specific department (e.g. X-ray) per day.
• Effectiveness – readmission rates.

See chapter 31

A performance audit is an independent examination of the efficiency and effectiveness of government undertakings, with due regard to economy, and the aim of leading to improvements.

See chapter 31

Although other audit procedures may be conducted in an agreed-upon-procedures engagement, due diligence is essentially a review engagement. The principal procedures are inquiry and analytical procedures because as such assignments are comparably short, trend analysis, etc is more appropriate than external confirmations, physical inventory observation, etc. Also, the review is likely to include forecasts (PFI) which cannot be ‘audited’.

See chapter 30

• Ethical considerations (e.g. fee for DD review create a self-interest threat for the audit).
• Scope of review engagement.
• Timescale and reporting deadline (and availability of staff).

See chapter 30

The scope of a DD assignment is generally much wider that an audit of historical financial statements. An audit essentially concerns only the current year and comparatives. DD may include:

• Financial information for the last five years (say)
• Management accounts
• Profit and cash flow forecasts
• Business plans

See chapter 30

• Records held by human resources.
• Incident reports/accident log book.
• Serious criteria (as opposed to ‘minor’).
• Minutes of board meetings (discussing incidents).
• Claims made under an employer’s insurance liability policy.
• Correspondence with lawyers (e.g. legal claims by injured employees).

See chapter 29

• Provision may be required to cover, for example, environmental damage and costs of restoration (IAS 37).
• Decommissioning costs, for example, should be capitalised on initial recognition (IAS 16).
• In a business combination, contingent liabilities for environmental damage must be recognised as provisions (IFRS 3).
• Environmental damage may result in the impairment of assets (IAS 38).

See chapter 29

An integrated report is a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term.
(This is assumed knowledge of Strategic Business Reporting.)

See chapter 29

A fraud investigation by a forensic accountant may be carried out:

• to quantify a possible claim under a fidelity policy
• to provide evidence for prosecution of the perpetrator(s)

(It may also enable steps to be taken to eliminate the system’s weaknesses which led to the fraud. However, if this was the main purpose it would most likely be carried out by internal audit, say, rather than a forensic accountant.)

See chapter 28

The main applications of forensic auditing include:

• Fraud investigations (also money laundering)
• Insurance claims
• Negligence claims
• Other
• Contract disputes
• Matrimonial disputes
• Asset tracing

See chapter 28

A forensic audit is the process of gathering, analysing and reporting on data (an ‘audit’) for use in connection with courts of law (‘forensic’).

See chapter 28

To ensure that assumptions are:

• reasonable (and not obviously wrong or over-optimistic);
• suitable for intended use (i.e. consistent with purpose of information); and
• adequately disclosed.

The ensure that PFI has been properly prepared and presented:

• on the basis of the assumptions;
• consistent with historical financial statements;
• using appropriate accounting principles.

See chapter 27

A statement of cash flows is a financial statement which is prepared and presented in a set of historical financial statements in accordance with IAS 7.
A cash flow forecast (or budget) may be prepared as an internal management tool (e.g. to assist in assessing going concern or evaluating a proposed capital investment) or to provide information to third parties (e.g. lenders).

See chapter 27

The examination of prospective financial information is a limited assurance engagement and the report will include a statement of ‘negative’ assurance.

See chapter 27

A forecast is based on assumptions about future events and management’s actions that are expected to happen (e.g. for the unexpired period of the current accounting period).
A projection is based future events and management actions which are not necessarily expected to take place (i.e. hypothetical/‘what-if’ assumptions).

See chapter 27

Related services include:
– Engagements to perform agreed-upon procedures
– Compilation engagements

See chapter 26

Review engagements include:

• Engagements to review historical financial statements
• Review of interim financial statements

See chapter 26

Assurance engagements include:

• Audits of historical financial information
• Reviews of historical financial information
• Other assurance engagements
• Examination of prospective financial information
• Assurance reports on controls at a service organisation
• Assurance engagements to report on the compilation of pro forma financial information included in a prospectus

See chapter 26

Non-consolidation of a material subsidiary would have a pervasive effect on the consolidated financial statements (since all the line items in the subsidiary’s financial statements should be consolidated 100%).
The audit opinion would be adverse – on the grounds of non-compliance with IFRS 3 Business Combinations.

See chapter 25

The pervasive lack of sufficient appropriate evidence will give rise to a disclaimer of opinion. The basis for the disclaimer of the opinion will explain the scope limitation.
(Even if this were a listed client, it would not be reported as a key audit matter as the auditor cannot have audited the financial statements.)

See chapter 25

The lack of disclosure gives risk to material misstatement. The audit opinion should therefore be qualified ‘except for’.
(If the matter had been adequately disclosed the auditor’s report would include a Material Uncertainty Related to Going Concern section and the audit opinion would not be modified in this regard.)

See chapter 25

If the client is a listed entity it would be a key audit matter. Due to inherent risk of error this would be of great significance to the audit and a matter communicated to those charged with governance. If the client is not a listed entity, it would not be reported.

See chapter 24

KAMs are those matters which, in the auditor’s professional judgement, were of most significance in the audit of the financial statements of the current period. They are selected from matters communicated to those charged to governance.
Inclusion of KAMs in the auditor’s report is a requirement only for listed companies.

See chapter 23

An ‘other matter’ paragraph draws the users’ attention to a matter which is relevant to their understanding of the audit, the auditor’s responsibilities or auditor’s report (rather than the financial statements).

See chapter 23

An ‘emphasis of matter’ paragraph draws the users’ attention to a matter which, although appropriately presented or disclosed in the financial statements, is fundamental to their understanding of the financial statements.

See chapter 23

A material uncertainty related to going concern should be reported in a separate section, suitably headed (e.g. ‘Material Uncertainty Related to Going Concern’) of the auditor’s report.

See chapter 23

Compliance with ISAs will be stated in the basis of opinion paragraph.
(The financial reporting framework (e.g. IFRS) will be identified in the opinion paragraph.)

See chapter 23

• Unmodified opinion
• Qualified opinion
• Adverse opinion
• Disclaimer of opinion

See chapter 23

Before the date of the auditor’s report the auditor has a proactive duty to identify subsequent events.
After the date of the auditor’s report the auditor’s duty is only to respond to facts which become known. For example:
if the financial statements have not yet been issued, management can still amend them (and the auditor amend the auditor’s report) – this is rare as the auditor’s report will generally be signed immediately before their issue;
if the financial statements have been issued, they may be withdrawn and reissued (with a new auditor’s report) – this is exceptional.

See chapter 22

Events after the reporting period are those that occur between the end of the reporting period and the date on which the financial statements are authorised for issue (IAS 10.
Subsequent events are:
events that occur between the date of the financial statements and the date of the auditor’s report; and
facts that become known after the date of the auditor’s report.

See chapter 22

Both adjusting and non-adjusting events are events after the reporting period (IAS 10). The difference is that adjusting events provide evidence of conditions that existed at the reporting date whereas as non-adjusting events indicate conditions that arose after the reporting date.

See chapter 22

A transnational audit is an audit of financial statements which is, or may be, relied on outside the audited entity’s home jurisdiction for purposes of significant lending, investment or regulatory decisions.

See chapter 21

A comfort letter is a formal letter of support that confirms a parent’s intention to keep a subsidiary in operational existence.

See chapter 21

Confirmation of date that control was obtained
Calculation of goodwill
Elimination of inter-company transactions
Agreement of inter-company balances (so that they can be eliminated)
Adjustments to apply uniform accounting policies
Adjustments for non-coterminous reporting dates

See chapter 21

Goodwill on acquisition is calculated as:
Fair value of consideration
Plus: Value of non-controlling interest (if any)
Less: Fair value of net assets acquired

See chapter 21

Component materiality is the materiality of a component as determined by the group auditor. It will be different for each component, lower than group materiality and not necessarily an arithmetical proportion of group materiality (i.e. their sum can be greater than group materiality).

See chapter 21

A component is an entity, business unit, function or business activity (or some combination thereof) determined by the group auditor for purposes of planning and performing audit procedures in a group audit.

See chapter 21

Disclosure required include:

• The related party relationship
• The types of transactions
• An indication of volume (amount or proportion)
• Pricing policies
• Amounts outstanding
• Terms of settlement
• Any allowances for irrecoverability

See chapter 20

The auditor must understand related party relationships to be able to:
recognise the increased risk of fraud; and
conclude on the fair presentation of related party transactions (in accordance with IAS 24) and compliance with legislation.

See chapter 20

Sales/purchase transactions with abnormal terms of trade (e.g. inflated prices or large discounts).
Leasing premises or providing management services on below market terms.
Unrecorded transactions (e.g. services provided at no charge).
Transactions lacking a business reason for their occurrence.

See chapter 20

A related party transaction is a transfer of resources or obligations between related parties, regardless of whether a price is charged.

See chapter 20

That management is not aware of any material events occurring after the reporting date that may require adjust or disclosure other than those that have been adjusted or disclosed.

See chapter 19

No – if management representation is the only source of evidence it is insufficient.

See chapter 19

The auditor should obtain written representations:

• To confirm management’s responsibilities relating to:
• The preparation of financial statements
• Information provided to the auditor and completeness of transactions recorded
• To support other audit evidence relevant to the financial statements.

See chapter 19

A Type 1 report concerns the design and implementation of the control systems. A Type 2 report concerns the operating effectiveness of the control system.

See chapter 18

• Receivables ledger management (factoring)
• Purchase ledger processing
• Tax planning and management
• Payroll processing
• Management accounting
• Internal audit

See chapter 18

Direct assistance is the use of internal auditors to perform audit procedures under the direction, supervision and review of the external auditor.

See chapter 17

Criteria for assessing whether the external auditor should seek to reply on the work of internal audit are:

• Objectivity (e.g. strong organisational status)
• Competence (including adequate resources)
• A systematic and disciplined approach
  (If any of these criteria are assessed as weak, the external auditor should not rely on the work of internal audit.)

See chapter 17

Auditor’s expert is an individual (or organisation) possessing expertise in a field other than accounting or auditing, whose work is used by the auditor in obtaining sufficient appropriate audit evidence.

See chapter 16

Management’s expert is an individual (or organisation) possessing expertise in a field other than accounting or auditing, whose work assists management in preparing the financial statements.

See chapter 16

Test data is data submitted for processing by the client’s computer system to test the operation of controls. If effective, the level of substantive procedures can then be reduced.

See chapter 15

Audit programs (software) are mainly used for substantive procedures and can therefore be used for analytical procedures.

See chapter 15

A performance obligation is satisfied over time if ONE of the following criteria is met:

• The customer receives and consumes the benefits of the goods or services while the contract is being fulfilled; or
• The performance creates or enhances an asset while it is controlled by the customer; or
• The performance does not create an asset which the supplier has an alternative use for and the supplier has the right to enforce payment for performance completed to date (e.g. a construction contract).
  (A performance obligation that is not satisfied over time is satisfied at a point in time.)

See chapter 14

The audit of a defined benefit scheme will require an independent consulting actuary’s report.

See chapter 14

All leases except short-term leases (not more than 12 months) and leases of low-value assets (less than $5,000) must be capitalised as right-of-use assets in the statement of financial position (with a
corresponding lease liability).

See chapter 14

Recoverable amount is the higher of:
Value in use
Fair value less costs of disposal

See chapter 14

By definition, adjusting events provide evidence of conditions that existed at the reporting date.

See chapter 14

A provision is a liability (i.e. an obligation) and must be recognised (i.e. in the statement of financial position). A contingent liability that is a possible (but not remote) obligation must be disclosed.

See chapter 14

Sufficient appropriate audit evidence is what is needed to support the auditor’s opinion and report. Sufficiency and appropriateness are interrelated – sufficiency is a measure of quantity and appropriateness is a measure of quality (relevance and reliability).

See chapter 13

Analytical procedures
Enquiry and Confirmation (a specific type of enquiry
Inspection (of records or documents or tangible assets)
Observation (of a process or procedure)
Recalculation (of mathematical accuracy) and Reperformance (independent execution of a procedure or control)

See chapter 13

assertions are the direct (explicit) and indirect representations that management makes about the transactions, balances and events that are embodied in the financial statements. For a liability, these assertions are:

• Existence
• Obligations
• Completeness
• Accuracy, valuation and allocation
• Classification
• Presentation

See chapter 13

Cut-off is the financial statement assertion that transactions and events have been recorded in the correct accounting period.

See chapter 13

Non-sampling risk is a component of detection risk and is the risk that arises for any reason not related to sample size.
Non-sampling risk can be minimised through, for example, adequate planning, assigning appropriate staff, the application of professional judgement, clear supervision and review of the work carried out.

See chapter 11

• Inherent risk (IR) is the susceptibility (risk) of material misstatement assuming no related internal controls.
• Control risk (CR) is the risk that internal controls do not prevent or detect and correct misstatements.
• Detection risk (DR) is the risk that the auditor will not detect a misstatement.
• The auditor must manage DR to manage overall audit risk. (IR and CR are assessed.)

See chapter 11

Business risk is the risk that an entity is unable to achieve one or more of its strategic objectives. It includes strategic risk, operational risk, financial risk and compliance risk.
(Other classifications of business risk include reputation risk, environment risk, process risk and information risk.)

See chapter 11

Performance materiality is used in designing and performing audit procedures and evaluating the aggregated of immaterial misstatements.

See chapter 10

Performance materiality is a lower amount set by the auditor to reduce to an appropriately low level the probability (i.e. risk) that the aggregate of uncorrected and undetected misstatements could exceed materiality for the financial statements as a whole.

See chapter 10

Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement.
It provides a threshold or cut-off point rather than being a primary qualitative characteristic which information must have if it is to be useful.

See chapter 10

• Discussion of significant matters with the engagement partner.
• Review of the financial statements and the proposed auditor’s report.
• Review of selected audit documentation relating to the significant judgments the engagement team made and the conclusions it reached.
• Evaluation of the conclusions reached in formulating the auditor’s report and consideration of whether the proposed auditor’s report is appropriate.

See chapter 9

1. The firm’s risk assessment process
2. Governance and leadership
3. Relevant ethical requirements
4. Acceptance and continuance of client relationships and specific engagements
5. Engagement performance
6. Resources
7. Information and communication
8. Monitoring and remediation process

See chapter 9

A system of quality management to provide it with reasonable assurance that:
(1) The firm and its personnel comply with professional standards and applicable legal and regulatory requirements; and
(2) Reports issued by the firm or engagement partners are appropriate in the circumstances.

See chapter 9

The likelihood that it could lead to material misstatements.
The susceptibility to loss or fraud of the related asset or liability.
The financial statement amounts exposed to the deficiency.
The volume of activity in the account balance or class of transactions exposed to the deficiency.

See chapter 8

A significant deficiency in internal control is one that, in the auditor’s professional judgment, is of sufficient importance to merit the attention of those charged with governance.

See chapter 8

To accumulate misstatements and communicate them to an appropriate level of management and request correction.
If there are uncorrected misstatements, to reassess materiality (and the overall audit strategy and audit plan).
To communicate the effect of uncorrected misstatements to those charged with governance.
To obtain written representation that the effects of uncorrected misstatements are immaterial.

See chapter 8

A misstatement is any difference between how a transaction, balance or event has been treated in financial statements and how it should have been treated (e.g. in accordance with IFRS). Misstatement may arise from error or fraud.

See chapter 8

• Disclaimer in auditor’s report (‘Bannerman clause’)
• Insurance
• Professional indemnity insurance
• Fidelity insurance
• Incorporation as limited liability partnership (LLP)
• Liability limitation agreement (an agreed ‘cap’)
• Proportional liability

See chapter 7

1. Foreseeability – the auditor knew or should have known that the third party would rely on the auditor’s work.
2. Proximity – the auditor’s relationship with the third party was sufficiently close.
3. It must be ‘fair, just and reasonable’ to impose a liability on the auditor.

See chapter 7

1. A ‘duty of care’ was owed to the injured party.
2. There was a breach of that duty.
3. The injured party suffered financial loss as a result of the breach.

See chapter 7

To those charged with governance (unless insignificant).
To an appropriate regulatory authority, even if not required by law.
To the shareholders, but only if the matter is material to the financial statements.

See chapter 6

Potential consequences of NOCLAR include:
– fines/penalties
– litigation/damages
– enforced discontinuation of business activities/expropriation of assets.
The main effects on the financial statements are therefore:
– understated liabilities
– non-disclosure of contingent liabilities
– inappropriate use of the going concern basis of accounting.

See chapter 6

Non-compliance with laws and regulations (i.e. acts of omission or commission, intentional or unintentional, which are contrary to prevailing laws or regulations).

See chapter 6

Tipping off’ is doing anything that might prejudice an investigation into actual or suspected money laundering activities.

See chapter 5

Concealing/disguising, converting or transferring money that is (or is suspected to be) the proceeds of crime.
Failure to report suspicion of money laundering.
Acquiring (obtaining), using and possessing (retaining) criminal property.
‘Tipping off’.

See chapter 5

Money laundering is a process whereby the proceeds of criminal activity are converted into assets appearing to have a legitimate origin.

See chapter 5

The conceptual framework approach to independence means:
– Identify threats to independence
– Evaluate the significance of those threats
– Apply safeguards to reduce threats to acceptable levels or otherwise eliminate by not accepting or terminating the audit engagement.

See chapter 4

Independence comprises:
– Independence of mind (i.e. ability to express a conclusion that has not been compromised in any way)
– Independence in appearance (i.e. a reasonable and informed third party should conclude that the integrity, objectivity or professional scepticism of the audit firm/audit team member has not been compromised).

See chapter 4

• Self-interest
• Self-review
• Advocacy
• Familiarity
• Intimidation

See chapter 4

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

See chapter 4

To request information that is relevant to deciding whether there is any professional reason why they should not accept appointment.

See chapter 3

Background information about the audit firm.
Relevant expertise and specialisms of the firm and individuals proposed for the audit team.
Scope of work proposed.
An outline of the audit approach including audit methodology, possible use of internal audit/CAATs etc.
Basis of fees.

See chapter 3

Professional behaviour’ means that the professional accountant:
– must how professional courtesy and consideration at all times
– should not bring the profession into disrepute
– should be honest and truthful (e.g. not make exaggerated claims or disparaging references to the work of others).

See chapter 3

The board should:
– present a fair, balanced and understandable assessment of the company’s position and prospects
– maintain sound risk management and internal control systems
– establish formal and transparent arrangements for applying corporate reporting, risk management and internal control principles and for maintaining an appropriate relationship with the company’s auditors.

See chapter 2

A regulatory authority (e.g. Stock Exchange) requires listed companies to:
– state that they have complied with corporate governance principles (e.g. under the UK Corporate Governance Code); or
– disclose and explain any non-compliance.

See chapter 2

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

See chapter 2

It is a ‘limited assurance’ engagement and the conclusion is expressed in ‘negative’ form.

See chapter 1