Corporate Governance Chapter 3
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Questions and Answers

What does the inspection of tangible assets provide conclusive evidence of?

  • Year-end reconciliations
  • Operational procedures
  • Fraud detection
  • Existence and valuation (correct)

    • What is a primary purpose of conducting an enquiry during an audit?

  • To gather information that requires corroboration (correct)
  • To solely validate balances
  • To replace other forms of evidence
  • To perform calculations for accuracy

    • What is the main goal of analytical procedures in an audit?

  • To calculate arithmetical accuracy
  • To observe operational compliance
  • To confirm external balances
  • To identify unusual relationships or variances (correct)

    • What does the confirmation process in auditing typically involve?

    <p>Obtaining external validation of balances</p> Signup and view all the answers

    What is the purpose of performing recalculation in the audit process?

    <p>To check the accuracy of financial statements</p> Signup and view all the answers

    Management's responsibility in financial statements involves making which of the following?

    <p>Ensuring a true and fair view</p> Signup and view all the answers

    What is the minimum frequency for reviewing directors subject to re-election?

    <p>Every 3 years</p> Signup and view all the answers

    What is one of the main aspects of corporate governance mentioned?

    <p>Risk management</p> Signup and view all the answers

    What is a requirement for the composition of audit committees?

    <p>At least three non-executives</p> Signup and view all the answers

    What role do audit committees play regarding external auditors?

    <p>Monitoring their independence and objectivity</p> Signup and view all the answers

    What should audit committees develop and implement policies regarding?

    <p>Engagement of external auditors for non-audit services</p> Signup and view all the answers

    Which of the following is a responsibility of audit committees?

    <p>Investigating possible improprieties through whistleblowing</p> Signup and view all the answers

    What experience is required for at least one member of the audit committee?

    <p>Experience in financial matters</p> Signup and view all the answers

    What is crucial for maintaining public confidence in financial information?

    <p>Independence and objectivity of the audit process</p> Signup and view all the answers

    What is the basis for assessing materiality in financial statements?

    <p>It is a matter of professional judgement.</p> Signup and view all the answers

    Which of the following is NOT a common measure for initial assessment of materiality?

    <p>10 – 15% of profit before tax</p> Signup and view all the answers

    What can misstatements in financial statements arise from?

    <p>Errors or fraud</p> Signup and view all the answers

    When should materiality be reassessed during an audit?

    <p>In response to new information or risks</p> Signup and view all the answers

    Sampling risk can be defined as the risk that the auditor's conclusion based on a sample may differ from what?

    <p>A larger, more comprehensive audit results in</p> Signup and view all the answers

    Which type of risk cannot be directly influenced by the auditor?

    <p>Both B and C</p> Signup and view all the answers

    What is the initial purpose of assessing inherent and control risk?

    <p>To provide a basis for evaluating detection risk</p> Signup and view all the answers

    How should auditors respond if they assess that inherent and control risk are high?

    <p>Conduct more extensive sampling procedures</p> Signup and view all the answers

    Why is audit sampling usually preferable to testing all items?

    <p>It is prohibitively expensive and time-consuming to test every single item.</p> Signup and view all the answers

    What does statistical sampling involve?

    <p>Random selection of a sample using probability theory.</p> Signup and view all the answers

    When is audit sampling not appropriate?

    <p>When the population is small.</p> Signup and view all the answers

    What are the two types of audit risks mentioned?

    <p>Risk of material misstatement and detection risk</p> Signup and view all the answers

    What is a key requirement of statistical sampling?

    <p>Use of random number tables or computer programs.</p> Signup and view all the answers

    What is one benefit of adequate planning for an audit?

    <p>It helps to manage and organize the audit engagement</p> Signup and view all the answers

    What do errors identified in a sample represent?

    <p>Projected errors across the entire population.</p> Signup and view all the answers

    Which option is NOT a step in the planning process?

    <p>Assign future audit opinions</p> Signup and view all the answers

    What is the auditor's responsibility regarding audit evidence?

    <p>To obtain sufficient and appropriate audit evidence.</p> Signup and view all the answers

    How does non-statistical sampling differ from statistical sampling?

    <p>Non-statistical sampling uses judgment to select sample items.</p> Signup and view all the answers

    How does adequate planning reduce risks associated with auditing?

    <p>By ensuring work is properly assigned</p> Signup and view all the answers

    What is the goal of conducting an audit using sampling methods?

    <p>To provide reasonable assurance rather than 100% accuracy.</p> Signup and view all the answers

    What should be built into the audit planning process according to best practices?

    <p>A rigorous review process</p> Signup and view all the answers

    Which of the following audits is listed as part of Section A for audit exam kit questions?

    <p>Epica</p> Signup and view all the answers

    What is the impact of fraud often assessed during the planning process?

    <p>It should be addressed through appropriate procedures</p> Signup and view all the answers

    Which of these is an objective of the planning phase in an audit?

    <p>Timely identification and resolution of potential problems</p> Signup and view all the answers

    Study Notes

    Corporate Governance

    • Key directors are subject to re-election by shareholders at least every three years.
    • Separation of roles is crucial, specifically between the chairman and CEO to improve governance.
    • Primary aspects include audit committees, risk management, nominations, and remuneration.

    Audit Committees

    • Composed of three non-executives, at least one member must have financial expertise.
    • Responsibilities include monitoring the external auditor's independence and effectiveness.
    • Develop policies regarding the engagement of external auditors for non-audit services.
    • Promote confidence in the integrity of published financial statements and handle whistleblower reports.

    Risk Management

    • Materiality is judged based on professional discretion, unique company circumstances, and user information needs.
    • Common benchmarks for assessing materiality:
      • ½ to 1% of revenue
      • 5 to 10% of profit before tax
      • 1 to 2% of assets
    • It is advised to continuously reassess materiality during audits due to emerging information or risks.

    Audit Risks

    • Sampling risk involves the possibility that conclusions from a sample may not represent the entire population.
    • Audit risks include risks of material misstatement and detection risks.
    • Inherent and control risks are outside an auditor’s control but can inform detection risk adjustments.

    Audit Planning

    • Effective planning ensures focus on significant areas, identification of potential issues, and efficient organization of audit engagements.
    • Timetable must be established alongside risk assessments and team assignments.
    • It emphasizes the efficiency and effectiveness in evidence gathering while considering the potential impact of fraud.

    Gathering Audit Evidence

    • Types of evidence include:
      • Inspection: Provides evidence of existence and valuation through physical examination.
      • Observation: Verifies procedure effectiveness.
      • Enquiry: Gathered through questioning, corroborated by other evidence.
      • Confirmation: Involves obtaining confirmations from third parties.
      • Recalculation: Checks accuracy in calculations.
      • Reperformance: Reassesses management procedures.
      • Analytical Procedures: Identifies unusual trends or variances requiring further investigation.

    Management Assertions

    • Management must ensure financial statements present a true and fair view.
    • Assertions are made for each financial statement item regarding accuracy, completeness, and valuation.

    Audit Sampling

    • Statistically, sampling is preferred over testing all items due to cost and efficiency.
    • Statistical sampling involves random selection, while non-statistical sampling relies on auditor judgment for item selection.
    • It is not suitable for small populations where the entire population can be audited directly.

    Evaluating Sample Results

    • Auditors must document each procedure performed on selected samples and the conclusions drawn.
    • Errors in samples can be projected across the whole population to evaluate financial statement accuracy.

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    Description

    Explore key concepts of corporate governance, focusing on the roles of directors and their accountability to shareholders. This quiz delves into the processes of selection, compensation, and re-election of directors. Test your understanding of these critical governance mechanisms and their impact on company management.

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