Auditing Concepts and Practices Quiz

Assurance

• Practitioners examine subject matter, matching it to criteria, providing evidence to intended users.
• Assurance engagements involve three parties: intended users, responsible party, and practitioner (accountant).
• Suitable subject matter is required, data prepared by the responsible party needing verification.
• Subject matter is evaluated against criteria to form an opinion.
• Sufficient appropriate evidence is gathered for the required level of assurance.
• Assurance reports provide opinions to intended users.

Types of assurance assignments

• Reasonable assurance (high, not absolute): provided by external audits.
• Limited assurance (moderate): provided by reviews of financial statements.
• Practitioners gather evidence ensuring subject matter is plausible.
• Procedures are less comprehensive than in audits.
• Negative assurance: nothing has come to light to suggest errors or problems.

Assignments where no assurance is given

• Agreed-upon procedures: report of factual findings, no assurance.
• Compilation engagements: collecting, classifying and summarising information.

Inherent Limitations of audit

• Sampling: Auditors don't test 100%, some errors may not be detected.
• Subjectivity: Financial statements use judgements.
• Internal control systems: Human error and management override possibility.
• Audit evidence: Persuasive, not conclusive; reliance on estimations/judgments.
• Materiality issues: May overlook small errors.

Auditor's Duties

• Form an opinion on financial statements accuracy and preparation according to framework.
• Issue audit reports ensuring accuracy and compliance with legislation
• Auditor's rights include access to company documents, information, meeting attendance.

Client Acceptance/Continuance

• Outgoing auditor communication: Assess any ethical or professional reasons for not accepting appointment
• Client-related issues: Assessing client's reputation, risk and potential.
• Practitioner-related issues: Ethical considerations, competence and resources for audit.

Preconditions for an audit

• Acceptable financial reporting framework
• Assess the nature of entity and financial statements.
• Management agreement: Responsible for the financial statements, and internal controls.

Changes to engagement letters (recurring audits)

• Revisions needed if there are significant changes in management, ownership, nature of business, legal or regulatory matters or financial reporting framework.

Audit Planning

• Planning helps proper attention to important areas of the audit
• Identifying and resolving problems promptly.
• Proper audit organization for efficiency and effectiveness.
• Choosing competent team members with appropriate capabilities, delegation.
• Direction and supervision of team, review of their work.

Audit Risk and Risk Response

• Assessing risk at planning stage focuses attention on areas of material misstatement.
• Understanding the entity is vital for effective audit.
• Early risk identification leads to more efficient and cost-effective audit.
• Selection of skilled audit team members.
• Assessing and reducing risk for inappropriate audit opinion.
• Understanding risks of fraud, money laundering, going concern concerns, etc.
• Evaluating risk factors, and using suitable procedures to appropriately respond to them.

Audit Risk Model

• Audit risk = Risk of material misstatement x Detection Risk
  • Risk of material misstatement includes inherent risk and control risk.
  • Detection risk relates to the auditor's procedures in efficiently detecting any material misstatement.

Understanding the Client/Knowledge of the Business

• Prior year financial statements.
• Previous auditor's files for prior years.
• Discussions with the client.
• Any other available information (e.g., client's website).

Measurement and Review of Financial Performance

• Performance measures, such as KPIs, budgets, targets
• Internal controls- design and implemented to control risk
• Identify any issues in previous year's audit
• Evaluate if the company is using e-commerce operations

Substantive procedures

• Analytical procedures: Comparing financial statement data to identify any major discrepancies with estimates.
• Tests of details: Inspecting documents and records to support balances of accounts, individual transactions, etc. (e.g. to ensure that credit balances for any receivables exist).
• Tracing: Verifying from supporting documents to records.
• Vouching: Verifying from records to supporting documents.

Receivables Circularization

• Methods for sending confirmation to those owed money by the client.
• Positive or negative confirmations (Positive require reply from debtor about correct balance and negative request for a response if the balance is not correct).
• Non-replies: Following-up to obtain sufficient appropriate audit evidence.

Inventory

• Review prior year audit files, discuss with management about any significant inventory issues.
• Confirm procedures for identifying and segregating any damaged goods.
• Testing the count itself, matching physical stock numbers to the records.
• Investigating any significant fluctuations.
• Cut-off Procedures
• Procedures for inventory held by third parties.

Substantive Testing: Property, Plant, and Equipment

• Obtain sample to check, physically verify assets or enquire third parties
• Review repairs and maintenance
• Ensure all disposals are authorised and correctly recorded

Substantive Testing: Revenue and Capital Expenditure, Depreciation

• Ensure expenses are correctly categorised and recorded appropriately
• Confirm accuracy of depreciation calculation
• Review depreciation policy’s consistency with prior years and standard industry practices.

Substantive Testing: Payroll

• Check total payroll expense against prior year.
• Recalculate for a sample of employees.
• Confirm details of employees included in payroll.
• Agree that amounts paid relate to correct employees.
• Reconcile with bank statements.

Substantive Testing: Corporation Tax

• Agreeing tax liability to tax schedule and payments made.
• Verify amounts are correctly reflected in financial statements.

Substantive Testing: Long Term Loans

• Agree loan balances to loan statements.
• Confirm loan is properly recorded.
• Verify existence of loan agreements.

Substantive Testing: Accounting Estimates

• Review management process, controls
• Identify any significant assumptions.
• Testing the effectiveness of controls over estimates.
• Obtaining representations of management (significant assumptions).

Audit Procedures

• Inspection, observation, analytical procedures, re-performance, recalculation, and confirmation.

Other Matters

• Prior period financial statements (if audited by different auditor).
• Restriction on the use of the auditor's report.
• Subsequent events after the report date.

Going Concern

• Auditors need to consider if the entity can continue as a going concern.
• Look for indicators of going concern difficulties (e.g., losses, debt)
• Evaluate management judgments and strategies to address the issues.

Other procedures

• Communication with those charged with governance
• Any other matters the auditor thinks are significant.

Audit Sampling

• Random, systematic, haphazard, block selection methods.
• Evaluate if the sample is representative of the population (to avoid sampling risk).
• Statistical versus non-statistical sampling.

Audit Procedures on Specific Areas

• Specific audit procedures focus on the key assertions of particular accounts/classes.

Internal Control Systems Components

• Control environment, risk assessment process, information systems and communication, control activities, and monitoring of controls.

Internal Audit

• Independent appraisal activity, evaluating the adequacy and effectiveness of existing controls.
• Types include: value-for-money, IT and operational.

Conflict of Interest

• Avoiding conflicts of interest by placing client's interests first.
• Using suitable safeguards to mitigate potential threat.
• Disclosure of potential threats to those charged with governance.

Quality Control

• Engagement quality control review of important judgments and conclusions.

Test your knowledge on key auditing concepts, including performance materiality, factors affecting audit timing, and considerations before accepting an audit engagement. This quiz covers essential aspects that auditors must be aware of to ensure compliance and effectiveness in their work.