Auditing Concepts and Practices Quiz

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Questions and Answers

What is performance materiality set by the auditor?

It refers to the amount set at less than the materiality levels for specific transactions. (correct)

It is a fixed amount determined annually.

It is always equal to the materiality level.

It is only applicable to bank balances.

Which of the following factors is considered when identifying material by size?

Related party transactions only

Legal compliance of transactions

1% of revenue (correct)

Internal audit effectiveness

What is an example of material by nature?

Final reporting deadlines

Fraud or unlawful transactions (correct)

Meeting with management

Industry-specific reporting requirements

What aspect does the timing of the audit include?

Final auditor's report submission Signup and view all the answers

Which of the following influences the overall approach to the audit?

The financial reporting framework Signup and view all the answers

What is one of the normal timetables for an audit?

An interim visit through the accounting year Signup and view all the answers

Which of these is NOT considered a key factor in the timing of an audit?

The weather conditions on audit day Signup and view all the answers

Which scenario is an example of material by nature related to accounting policies?

Incorrect application of an accounting policy affecting future periods Signup and view all the answers

What is the first action an auditor should take before accepting an audit client?

Communicate with the outgoing auditor Signup and view all the answers

Which factor should a firm consider regarding the client's management before accepting an audit engagement?

The reputation and integrity of the client's management Signup and view all the answers

What is the auditor's obligation regarding the outgoing auditor before accepting an engagement?

To obtain permission from the client’s management for communication Signup and view all the answers

What should be assessed concerning the audit fee before accepting a new client?

Whether the expected audit fee is adequate in relation to the audit risk Signup and view all the answers

Which of the following is NOT a consideration before accepting an audit client?

Client's previous audit fees Signup and view all the answers

Why must an auditor communicate with the outgoing auditor?

To assess ethical or professional reasons for non-acceptance Signup and view all the answers

What must be considered about risk before accepting an audit engagement?

The level of risk attached to the audit and if it is acceptable to the firm Signup and view all the answers

What should an auditor assess regarding compliance issues before accepting an audit client?

Any issues that might threaten compliance with the ACCA’s Code of Ethics Signup and view all the answers

Which of the following is NOT considered an example of effective computer-based controls?

Keeping computers unlocked in open areas Signup and view all the answers

What is the primary objective of application controls in a computer-based accounting system?

To guarantee the accuracy and validity of accounting records Signup and view all the answers

Which of the following is an example of an input control?

Format checks on data entry Signup and view all the answers

What do range checks help to ensure in data input controls?

Data values are within acceptable limits Signup and view all the answers

Which of the following controls would be categorized as a data processing control?

Compatibility checks between fields Signup and view all the answers

What do uninterruptible power supplies serve to protect?

Computer systems from sudden power loss Signup and view all the answers

Which of the following is a component of input data controls?

Performing range checks on entered data Signup and view all the answers

What is the role of a disaster recovery plan in computer-based systems?

To recover and restore data after an incident Signup and view all the answers

What is the purpose of exception checks in processing controls?

To highlight unusual situations that arise during input Signup and view all the answers

Which of the following best describes a sequence check?

Rejecting documents processed out of sequence Signup and view all the answers

How do control totals help with data input?

By comparing pre-input totals with system totals Signup and view all the answers

What do existence checks ensure during data input?

Key data must be entered to avoid rejection Signup and view all the answers

What is the primary function of check digit verification?

To protect against accidental data reversal Signup and view all the answers

How do document counts contribute to the completeness of input?

By comparing total input number with the expected count Signup and view all the answers

What is the approach of one-for-one checking?

Verifying each invoice against the purchase order individually Signup and view all the answers

Why are processing controls necessary in data input?

To ensure timely updates and accurate processing of data Signup and view all the answers

What is the primary formula for calculating audit risk?

Audit Risk = Risk of Material Misstatement x Detection Risk Signup and view all the answers

What does inherent risk refer to?

The susceptibility of an assertion to misstatement before consideration of controls Signup and view all the answers

Which of the following increases inherent risk?

Expanding into new locations Signup and view all the answers

What does control risk signify in the context of auditing?

The risk that misstatements will not be prevented or detected on time Signup and view all the answers

Which factor is NOT associated with increasing inherent risk?

Effective internal control Signup and view all the answers

In which scenario would control risk likely be high?

Internal controls are poorly designed or implemented Signup and view all the answers

What is a potential consequence of high inherent risk?

Increased susceptibility to material misstatements Signup and view all the answers

Which of the following illustrates a condition affecting control risk?

Weaknesses in internal control processes Signup and view all the answers

What is a primary advantage of using flowcharts to illustrate the internal control system?

They simplify the process of identifying missing controls. Signup and view all the answers

Which disadvantage is associated with narrative notes?

They may not capture all control details effectively. Signup and view all the answers

What is a significant drawback of flowcharts mentioned in the content?

They might require complete redrawing for minor amendments. Signup and view all the answers

Flowcharts help facilitate understanding of a system because they:

Use standard symbols and a logical sequence. Signup and view all the answers

Why might flowcharts be time-consuming to create despite their advantages?

Accompanying narrative notes can be lengthy. Signup and view all the answers

Which system is flowcharting not generally suitable for?

Systems with numerous unusual transactions. Signup and view all the answers

What can be a permanent feature of flowcharts?

They can serve as an indefinite record of a system. Signup and view all the answers

Which disadvantage of narrative notes is highlighted in the content?

They can obscure the identification of controls. Signup and view all the answers

Study Notes

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.

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Description

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.