AAA flashcards

What is professional scepticism? Professional scepticism is an attitude that means that the practitioner questions and critically assesses the validity and reliability of evidence. See chapter 1

An assurance report concludes ‘Based on our work described in this report, nothing has come to our attention that causes us to believe that internal control is not effective, in all material respects, based on … [criteria].’ What term describes this engagement and what term describes the conclusion expressed? It is a ‘limited assurance’ engagement and the conclusion is expressed in ‘negative’ form. See chapter 1

What is meant by a ‘comply or explain’ approach to corporate governance? 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

What does the principle of ‘accountability’ mean? 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

What is the fundamental principle of ‘professional behaviour’? 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

What information would usually be included in a tender for an audit? 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

What are the fundamental principles of ACCA’s ‘Code of Ethics and Conduct’?

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

See chapter 4

What is ‘independence’? 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

What is meant by the conceptual framework approach to independence? 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

What is ‘money laundering’? Money laundering is a process whereby the proceeds of criminal activity are converted into assets appearing to have a legitimate origin. See chapter 5

What types of offence fall within the scope of money laundering? 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

What is ‘tipping off’? Tipping off’ is doing anything that might prejudice an investigation into actual or suspected money laundering activities. See chapter 5

What is ‘NOCLAR’? 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

What are the main effects that NOCLAR may have on financial statements? 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

To whom can the auditor report NOCLAR? 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

What measures can auditors take to restrict their exposure to liability?

• 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

What is a ‘misstatement’ in a financial statement. 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

What is a ‘significant deficiency in internal control’? 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

What is a ‘system of quality management’? 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

What does an ‘Engagement Quality Review’ of any client involve?

• 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

What is materiality? 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

What is performance materiality used for? Performance materiality is used in designing and performing audit procedures and evaluating the aggregated of immaterial misstatements. See chapter 10

What is performance materiality? 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

What are the components of business risk? 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

What is non-sampling risk and how can it be minimised? 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

What is cut-off? Cut-off is the financial statement assertion that transactions and events have been recorded in the correct accounting period. See chapter 13

What assertions are relevant to a liability? 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

What is ‘sufficient appropriate’ audit evidence? 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

What is the ‘recoverable amount’ of an asset (or cash-generating unit). Recoverable amount is the higher of: Value in use Fair value less costs of disposal See chapter 14

How should leases be treated in accordance with IFRS 16? 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

What audit evidence is necessary for the audit of a defined benefit scheme? The audit of a defined benefit scheme will require an independent consulting actuary's report. See chapter 14

What is the purpose of test data? 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

Who is a ‘management’s expert’? 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

Who is an ‘auditor’s expert’? 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

What is ‘direct assistance’? 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

Why should the auditor obtain written representations? 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

What finance function activities may be outsourced?

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

See chapter 18

What is a related party transaction? A related party transaction is a transfer of resources or obligations between related parties, regardless of whether a price is charged. See chapter 20

What are the principal auditing issue arising from related party relationships? 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

In the context of the audit of group financial statements, what is a component? 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

What is component materiality and how does it compare with group materiality? 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

How is goodwill calculated on initial acquisition of a subsidiary? 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

What is a ‘comfort letter’? 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

What is a ‘transnational audit’? 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

What is the difference between an adjusting event and a non-adjusting event? 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

What is the auditor’s responsibility for subsequent events? 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

What are the four types of audit opinion?

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

See chapter 23

What is an ‘emphasis of matter’ paragraph? 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

What is an ‘other matter’ paragraph? 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

What is a key audit matter (KAM)? 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

Shortly before the reporting date a fire in the accounts department destroyed many of the accounting records and management has been able to only partially reconstruct them. How would this affect the auditor’s report? 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

During the year your client acquired a subsidiary that is material to the group. The component auditor has given an unmodified opinion on the subsidiary’s financial statements, which report a loss for the year. The group financial statements show only the investment at cost and management has refused to consolidate the subsidiary’s results. How would this affect your audit opinion? 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

What types of engagement may be described as review engagements? Review engagements include:

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

See chapter 26

What types of engagement are described as related services? Related services include: - Engagements to perform agreed-upon procedures - Compilation engagements See chapter 26

What is a ‘forensic audit’? 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

What are the main applications of forensic auditing? 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

What might the purposes of a fraud investigation by a forensic accountant? 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

What is an ‘integrated report’? 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

What is a ‘performance audit’? 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

What are the uses of performance information?

• 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

What is the 'applicable financial reporting framework'?

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

What is a 'component auditor'? A component auditor is an auditor who performs audit work related to a component for purposes of the group audit See chapter 21

A component auditor is a part of the engagement team for a group audit. Is this statement true or false? True See chapter 21

What are 'common controls'? 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