Audit Q2 PDF

Part 1: Audit planning and risk of audit 1. What is a statutory audit? a. **Audit that is obligatory** b. The audit of the consolidated annual financial statement of a group of companies i. banks, insurance companies ii. cooperative savings and credit unions...

Part 1: Audit planning and risk of audit 1. What is a statutory audit? a. **Audit that is obligatory** b. The audit of the consolidated annual financial statement of a group of companies i. banks, insurance companies ii. cooperative savings and credit unions iii. entities trading securities and provisions on investment funds 2. Present the definition of audit risk c. The risk that an auditor may issue an inappropriate opinion on financial statements that are materially misstated. d. The risk that the auditor iv. will issue an unmodified opinion even though the FS contains a material misstatement or omission; v. will issue a modified opinion even though the FSs are properly summarized in all material aspects. 3. What kind of audit risk can we describe or mention and what is the difference between them ----------- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- Risk type Definition What differentiates it Inherent The risk that there is a material misstatement due to the nature of the industry - eg. some misstatements happen often due to many complex transactions - **assuming no internal controls** **Unrelated** to the internal control system or the auditor's work - some misstatements are bound to happen Control The risk that the internal control won't prevent or detect material misstatements because it's not effective enough Related to the effectiveness of **internal control system** Detection The risk that audit procedures will not detect a material misstatement. Related to the effectiveness of the **auditor's work** ----------- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- 4. Present the difference between final and interim or begin audit e. Interim vi. Done during the financial year vii. To understand company viii. To do tests of control ix. Preliminary testing to reduce the workload during the final audit f. Final x. Done after the financial year-end xi. Verifying financial statements to check if there are no material misstatements xii. Considering assertions in fs to e.g., check for completeness, accuracy 5. What factors to consider by an external auditor when an external auditor wants to use the work of an internal audit g. Competence of Internal Auditors: xiii. The internal audit function must have adequate skills, experience, and knowledge to perform its work effectively. xiv. This includes: 1. Qualifications and training of internal auditors. 2. Appropriate supervision of internal audit activities. h. Objectivity: xv. Evaluate the internal audit\'s independence from management. xvi. Factors that support objectivity include: 3. Internal audit\'s organizational status (e.g., reporting directly to the board or audit committee). 4. Policies that protect internal auditors from managerial interference. 5. Independence of internal auditors from the areas they audit. i. Systematic and Disciplined Approach: xvii. The internal audit function must follow a structured methodology, including: 6. Clear documentation of processes and work. 7. Adequate quality control procedures, such as reviews of internal audit work. j. Scope of Work: xviii. Determine whether and to what extent the internal audit work can be used. k. Communication and Coordination: xix. Use direct assistance from internal auditors during the audit. xx. Appropriately direct, supervise, and review the work of internal auditors if used for direct assistance. 6. Mention the difference between internal and external audit -------------- ------------------------------------------------------------- ------------------------------------------------------- Internal External Purpose Check internal controls, risk management, and governance Form an independent opinion on the fairness of the FS Reporting To the management To the shareholders Scope Border, large scope Narrower scope - mainly focused on FS Independence Lower - can be influenced by management Greater - independent of the audited company Works Continuously Once a year Auditors Usually employees of the company but can also be outsourced From an external and independent company -------------- ------------------------------------------------------------- ------------------------------------------------------- 7. Define materiality l. It is the impact of a misstatement m. The auditor needs to assess xxi. If the misstatement affects the economic decisions of users 8. Eg overstating profits to attract investors when materiality is significant xxii. What is the size and nature of misstatements xxiii. What are the information needs of the users as a group n. The determination of materiality is a matter of professional judgment xxiv. Is subjective o. Applied when planning and conducting the audit 8. Present the difference between executive and trivial materiality ------------- --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------------------------------- ---------------------------------- Materiality Definition Purpose Threshold Executive The overall materiality level for FS as a whole If the threshold is exceeded, the misstatements are material Highest Performance To reduce the probability of undetected misstatements to an appropriately low level To detect misstatements before it's not too late - before they reach executive materiality level or become large enough to influence economic decisions Lower than executive - 60-85% Trivial To check if the misstatements can be ignored due to being too small to have an impact If the threshold is not exceeded, the misstatements are irrelevant Lowest - up to 5% of materiality ------------- --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------------------------------- ---------------------------------- 9. What is the difference between reasonable and limited assurance? +-----------------------+-----------------------+-----------------------+ | | Reasonable | Limited | +-----------------------+-----------------------+-----------------------+ | Level | High level of | Moderate level of | | | assurance (not | assurance, lower than | | | absolute) that FS has | reasonable that FS | | | no misstatements | has no misstatements | +-----------------------+-----------------------+-----------------------+ | Procedures | Extensive and | Less extensive: | | | detailed: | | | | | - Inquiry | | | - Inspection | | | | | - Analytical review | | | - Observation | | | | | | | | - Analytical | | | | procedures | | +-----------------------+-----------------------+-----------------------+ | Opinion | Positive | Negative | +-----------------------+-----------------------+-----------------------+ | Engagement risk | Reduced to the lowest | Reduced to an | | | practicable level | acceptable level but | | | | not as low as | | | | reasonable | +-----------------------+-----------------------+-----------------------+ | Scope | Broad and requires | Narrower scope | | | more time and effort | | +-----------------------+-----------------------+-----------------------+ | Purpose | Obtain evidence to | Identify material | | | form an opinion | misstatements or | | | | non-compliance | +-----------------------+-----------------------+-----------------------+ | Examples | - FS audit | - Review of interim | | | | FS | | | - Compliance audit | | | | | - For non-financial | | | | reporting | +-----------------------+-----------------------+-----------------------+ 10. Elements of the CREST model p. Used to assess audit risk and internal control effectiveness q. Criteria xxv. Are followed when evaluating and measuring the subject to issue an opinion r. Report xxvi. The opinion is expressed in a report for intended users and provides either reasonable or limited assurance s. Evidence xxvii. Is sufficient and is collected to support the required level of assurance. t. Subject matter xxviii. The data to be evaluated that has been prepared by the responsible party xxix. The subject that is audited which can take various forms, including financial results, non-financial results, processes, and behavior u. Three party relationship xxx. Parties involved. Intended users, the auditor, and the party responsible for the subject of the audit. 11. Define independence v. Connected to principles of objectivity and integrity w. Independence of mind xxxi. A state of mind that is not affected by factors that may compromise judgment xxxii. One can act with integrity, and exercise objectivity and professional skepticism, x. Independence in appearance xxxiii. Avoiding situations that could make others doubt the auditor\'s objectivity, integrity, and professional skepticism even if the auditor is acting fairly xxxiv. Making sure that outside observers think the auditor is independent 12. Define professional judgment y. Being able to decide what is the best approach when taking action during the audit z. Based on knowledge and experience in auditing, accounting, and ethical standards a. Critical for risk assessment, evidence evaluation, and decision-making 13. Define professional skepticism b. Having a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence c. Including sensitivity to xxxv. test evidence that contradicts other test evidence obtained, xxxvi. information that undermines the reliability of documents and answers to questions used as evidence for the study, xxxvii. conditions that may indicate the possibility of fraud 14. Define advocacy d. a professional accountant will promote a client\'s or employing organization\'s position to the point that the accountant\'s objectivity is compromised 15. Define related services e. Services provided by auditors that aren't in the scope of traditional audits but still require professional knowledge and skills f. Are based on an agreement between the service provider and the client, outlining the purpose, scope, methodology, and expected outcomes g. Examples xxxviii. due-diligence services xxxix. agreed-upon procedures for shareholders - verification of certain documents, xl. expenses, contracts 16. Present a few examples of factors of going concern → (Assessing the entity's ability to continue operations). h. Financial xli. Indications of withdrawal of financial support by creditors. xlii. Adverse key financial ratios. xliii. Substantial operating losses or significant deterioration in the value of assets used to generate cash flows. i. Operational xliv. Management intentions to liquidate the entity or to cease operations. xlv. Loss of key management without replacement. xlvi. Loss of a major market, key customer(s), franchise, license, or principal supplier(s). Labor difficulties. xlvii. Shortages of important supplies. xlviii. Emergence of a highly successful competitor. j. Other xlix. Non-compliance with capital or other statutory or regulatory requirements, such as solvency or liquidity requirements for financial institutions. l. Pending legal or regulatory proceedings against the entity that may, if successful, result in claims that the entity is unlikely to be able to satisfy. li. Changes in law or regulation or government policy expected to adversely affect the entity. lii. Uninsured or underinsured catastrophes when they occur. 17. Procedures the auditor could use to assess the going concern k. Audit tests and analytical procedures to evaluate financial viability l. Analyzing and discussing cash flow, profit and other relevant forecasts with management. m. Analyzing and discussing the entity's latest available interim financial statements. n. Reading the terms of debentures and loan agreements and determining whether any have been breached. 18. What kind of function of audit comity you can describe o. Monitoring of financial statements, internal control review. p. Monitoring and reviewing the functioning of the department/internal audit unit. q. In the absence of an internal audit department annual consideration of whether such a department should be established. r. Assessing and monitoring the objectivity and independence of the external auditor. s. Approving the terms of employment and remuneration of the internal auditor. t. Making recommendations on the hiring and dismissal of the internal auditor. u. Implementing a policy on the provision of non-audit services by the external auditor. v. Monitoring arrangements that protect the privacy of whistleblowers. 19. How are the standards established a. Establish a task force to develop a draft standard. b. Discussion of the proposed standard at a public meeting. c. Public presentation of the draft standard. d. Consideration of comments received from the public. e. Approval by IAASB members. Part 2: Internal control systems 1. Define the internal control system a. Ensures the reliability of financial reporting, compliance with laws and regulations, and efficiency of operations. b. It helps prevent fraud, errors, and misstatements. 2. Define and give examples of internal control elements +-----------------------+-----------------------+-----------------------+ | Element | Definition | Example | +-----------------------+-----------------------+-----------------------+ | Control environment | The foundation of the | A company enforces a | | | organization, | strong ethical code | | | including governance | of conduct | | | and management to | | | | influence control | | | | awareness of the | | | | employees | | +-----------------------+-----------------------+-----------------------+ | Risk assessment | It protects the | A company assesses | | | company from | the risk of fraud in | | | unexpected and bad | cash transactions and | | | situations that could | implements additional | | | negatively impact | verification | | | profitability. | procedures | | | | | | | Internal controls | | | | minimize the risk | | +-----------------------+-----------------------+-----------------------+ | Information system | The information | Reporting phishing | | | system, IT, computers | | +-----------------------+-----------------------+-----------------------+ | Control activities | Are the policies that | - **Authorization** | | | outline what should | and approvals - | | | or shouldn\'t be done | check if a | | | and the procedures | transaction is | | | that are the actions | valid | | | taken to implement | | | | the policies | - **Reconciliations | | | | ** - | | | | compare two or | | | | more data | | | | elements | | | | | | | | - **Verification** | | | | - | | | | compare two or | | | | more items with | | | | each other or | | | | compare an item | | | | with a policy to | | | | check if there's | | | | a need for | | | | follow-up if | | | | items don\'t | | | | match or don\'t | | | | follow the policy | | | | | | | | - **Physical or | | | | logical | | | | controls** - ones | | | | that enforce | | | | security in case | | | | of unauthorized | | | | access | | | | | | | | - **Segregation of | | | | duties** - | | | | assigning | | | | different | | | | responsibilities | | | | to people when | | | | authorizing | | | | transactions | +-----------------------+-----------------------+-----------------------+ | Monitoring internal | Ongoing evaluation to | Internal audit to | | control system | make sure that the | detect | | | internal control | inconsistencies | | | system is effective | | +-----------------------+-----------------------+-----------------------+ 3. Advantages and disadvantages of outsourcing internal auditors c. Advantages of IA outsourcing i. There is no need to recruit employees. ii. The service provider has specialists in many fields. iii. The service provider can quickly replace or organize the IA department/function. iv. Eliminates the cost of employee training. v. The contract may be for a specific period. vi. Flexibility in contract duration allows contractors to be hired only when they are needed. vii. Can be used on an ad hoc basis. viii. Greater independence. ix. Obtaining opinions without constant investment of money and time. d. Disadvantages of IA outsourcing x. The impact on employee morale if layoffs are carried out. xi. Lack of complete knowledge of the subject. xii. Cost. xiii. Data access. xiv. Staff (auditors) turnover. xv. The risk of problems with independence and objectivity if the company uses the same firm to provide both internal and external audit services. Part 3: Final audit 1. What procedures and documents can we use to obtain sufficient and appropriate audit evidence 2. Assertions about classes of transactions and events, and related disclosures, for the period under audit +-----------------------+-----------------------+-----------------------+ | Assertion | Definition | Example | +-----------------------+-----------------------+-----------------------+ | Occurrence | Transactions and | Sales transactions | | | events that have been | recorded in the | | | recorded or disclosed | financial statements | | | | are legitimate sales | | | | made to customers, | | | | not fictitious | | | | transactions. | +-----------------------+-----------------------+-----------------------+ | Completeness | - All transactions | All employee salaries | | | and events that | paid during the | | | should have been | period are recorded | | | recorded, have | in the payroll | | | been recorded. | expenses | | | | | | | - All related | | | | disclosures that | | | | should've been | | | | included, have | | | | been included | | +-----------------------+-----------------------+-----------------------+ | Accuracy | - Amounts and other | The company recorded | | | data relating to | a purchase of | | | recorded | inventory at the | | | transactions and | correct price, | | | events have been | including any | | | recorded | discounts, taxes, and | | | appropriately. | shipping fees | | | | | | | - Related | | | | disclosures have | | | | been measured | | | | appropriately. | | +-----------------------+-----------------------+-----------------------+ | Cutoff | Transactions and | A sale made on | | | events have been | December 31 is | | | recorded in the | recorded as revenue | | | correct accounting | in the current year, | | | period | not the next year. | +-----------------------+-----------------------+-----------------------+ | Classification | Transactions and | A payment for a | | | events have been | machine repair is | | | recorded in the | recorded under | | | correct accounts | \"Maintenance | | | | Expense\" and not | | | | under \"Asset | | | | Purchases.\" | +-----------------------+-----------------------+-----------------------+ | Presentation | - Transactions and | The company clearly | | | events are | presents the terms of | | | appropriately | its long-term debt, | | | aggregated or | such as interest | | | disaggregated and | rate, maturity date, | | | clearly | and repayment | | | described. | schedule, in the | | | | footnotes. | | | - Related | | | | disclosures are | | | | relevant and | | | | understandable in | | | | the context of | | | | financial | | | | reporting. | | +-----------------------+-----------------------+-----------------------+ 3. Assertions about account balances, and related disclosures, at the period end: +-----------------------+-----------------------+-----------------------+ | Assertion | Definition | Example | +-----------------------+-----------------------+-----------------------+ | Existence | Assets, liabilities, | The cash balance at | | | and equity interests | year-end accurately | | | exist | reflects actual funds | | | | held by the company | | | | in its bank accounts | +-----------------------+-----------------------+-----------------------+ | Rights and | - The entity holds | The company has | | obligations | or controls the | ownership rights to | | | right to assets. | the inventory it | | | | reports on the | | | - Liabilities are | balance sheet and has | | | the obligations | the obligation to | | | of the entity. | repay outstanding | | | | loans | +-----------------------+-----------------------+-----------------------+ | Completeness | - All assets, | The company has | | | liabilities, and | included all | | | equity interests | outstanding accounts | | | that should have | payable in its | | | been recorded, | balance sheet, | | | have been | including any | | | recorded. | invoices received but | | | | not yet paid at the | | | - All related | end of the period | | | disclosures that | | | | should've been | | | | included, have | | | | been included. | | +-----------------------+-----------------------+-----------------------+ | Accuracy, valuation, | - Assets, | Accounts receivable | | and allocation | liabilities, and | are properly valued, | | | equity interests | and an adequate | | | have been | allowance for | | | included in the | doubtful accounts has | | | financial | been made based on | | | statements at | the estimated | | | appropriate | collectability of | | | amounts. | outstanding balances | | | | | | | - Any resulting | | | | valuation or | | | | allocation | | | | adjustment have | | | | been | | | | appropriately | | | | recorded. | | | | | | | | - Related | | | | disclosures have | | | | been measured | | | | appropriately. | | +-----------------------+-----------------------+-----------------------+ | Classification | Assets, liabilities, | Long-term debt is | | | equity interests have | classified as a | | | been recorded in the | non-current | | | correct accounts | liability, and | | | | accounts payable are | | | | classified as current | | | | liabilities if they | | | | are due within one | | | | year | +-----------------------+-----------------------+-----------------------+ | Presentation | - Assets, | The company has | | | liabilities, and | disclosed the terms | | | equity interests | of its long-term | | | are appropriately | borrowings, including | | | aggregated or | interest rates, | | | disaggregated and | maturity dates, and | | | clearly | any covenants or | | | described. | restrictions | | | | | | | - Related | | | | disclosures are | | | | relevant and | | | | understandable in | | | | the context of | | | | financial | | | | reporting. | | +-----------------------+-----------------------+-----------------------+ 4. What procedures can be used to obtain some evidence needed to calculate the opinion of the audit process? a. Risk assessment procedures i. Observation 1. Inventory counting 2. Procedures for cash handling or reconciliation. 3. Ensuring that controls are being followed as documented. ii. Inquiries 4. Asking management, employees, and third parties about: a. Business processes and internal controls. b. Key assumptions in accounting estimates (e.g., expected credit losses, depreciation rates). c. Fraud risks or any identified instances of fraud. iii. Analytical procedures 5. Comparing financial data to: d. Historical trends, industry benchmarks, or budgets. e. Ratios (e.g., gross profit margin, current ratio) to identify unusual variances. 6. Analyzing non-financial data (e.g., production volumes, sales metrics) to validate financial data. iv. Inspection of documents 7. Examining a sample of source documents (e.g., invoices, purchase orders, contracts) to verify transactions. 8. Reviewing bank statements, board minutes, or other records for compliance and evidence of management's assertions. b. Further audit procedures v. Tests of control 9. To check if the internal control system is effective vi. Reliability testing 10. To detect material misstatements at the assertions level such as: f. tests of detail: i. to verify individual transactions and balances and g. substantive analytical procedures: ii. involve analyzing the relationship between information to identify unusual fluctuations that may indicate possible misstatements. 11. To detect errors (resulting in overstatement or understatement) or to detect omissions (resulting in understatement). 5. Present definitions and differences between tests of control and tests of details +-----------------------+-----------------------+-----------------------+ | | Definition | Difference | +-----------------------+-----------------------+-----------------------+ | Tests of control | Examination of the | Focus on the | | | accounting system of | processes and | | | a company and its | procedures (internal | | | internal control | controls) to reduce | | | system - check if | substantive testing. | | | policies are | | | | operating as intended | | +-----------------------+-----------------------+-----------------------+ | Tests of detail | Verifying individual | Part of reliability | | | transactions and | testing that consists | | | balances to check for | of tests of detail | | | errors and material | and substantive | | | misstatements, | procedures. | | | checking the accuracy | | | | of FS. | Happens after tests | | | | of control. | +-----------------------+-----------------------+-----------------------+ 6. Explain the purpose of, and procedures for, obtaining written representations c. Get the confirmation of 3^rd^ party, listy do kontrahentow d. Written representations are formal statements made by management during the audit, typically signed by the CEO or CFO, confirming certain matters or assertions related to the financial statements. These written representations serve as audit evidence, complementing other procedures performed during the audit. Control assignment 1. Audit procedures designed to detect material misstatements at the assertions level are: a. tests of details and tests of control b. tests of control and analytical procedures c. **tests of details and analytical procedures** 2. The control activities of the internal control system can include: d. **physical or logical controls** e. risk assessment process f. information system 3. The auditor shall express A QUALIFIED OPINION when: g. **having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements** h. having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements i. is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive 4. The principle of integrity requires an accountant: j. not to compromise professional or business judgment because of bias, conflict of interest or undue influence of others k. to act diligently and in accordance with applicable technical and professional standards l. **to be straightforward and honest in all professional and business relationships. Integrity implies fair dealing and truthfulness** 5. Reconciliation consist of: m. comparing an item with a policy and will likely involve a follow-up action when the item is not consistent with policy n. assigning different people the responsibilities of authorizing transactions o. **comparing two or more data elements** 6. Advocacy means that: p. a professional accountant will be deterred from acting objectively because of actual or perceived pressure, including attempts to exercise undue influence over accountant q. **a professional accountant will promote a client\'s or employing organization\'s position to the point that the accountant\'s objectivity is compromised** r. that a financial or other interest will inappropriately influence a professional accountant\'s judgment or behavior 7. The examples of related service are: s. examination of financial forecasts that are part of prospectuses t. evaluation of compliance of documents prepared and published by the Client with the applicable legal requirements u. **due-diligence services** 8. Which questions refers to internal control evaluation questionnaire (ICEQ): v. **How does the company ensure that only hours worked are recorded on timesheets?** w. Is a regular inventory count performed? x. Does a supervisor authorize all weekly timesheets? 9. The element of internal control is: y. **control environment** z. segregation of duties a. authorization 10. Professional skepticism is: b. an application of relevant training, knowledge and experience in auditing, accounting and ethics standards to make decisions about the course of action that is appropriate under the circumstances of the audit engagement c. an attitude which places an obligation on professional accountants to ensure that their professional or business judgment is not influenced by biases, conflicts of interest or pressure from third parties d. **an attitude which characterized by inquisitiveness (curiosity), sensitivity to conditions that may indicate possible distortion due to error or fraud, and criticality in evaluating the examination evidence** 11. International Standards on Assurance Engagements should be used to: e. reviews of historical financial information f. **assurance engagements other than audits or reviews of historical financial information** g. audits of historical financial information 12. Internal audit focus on: h. **future events and works continuously** i. future events and works mostly once a year j. historical financial information and works continuously 13. Detection risks means that: k. entity has a influence on all inherent risk l. the system of internal control does not prevent or does not detect errors m. **the procedures applied by the auditor to reduce audit risk to an acceptable level will not lead to the detection of a misstatement that exists and separately or together with other misstatements may be material** 14. Limited assurance engagement is: n. **an assurance engagement in which the practitioner reduces engagement risk to a level that is acceptable in the circumstances of the engagement but where that risk is greater than for a reasonable assurance engagement by negation (denials)** o. an assurance engagement in which the practitioner reduces engagement risk to an acceptably low level in the circumstances of the engagement as the basis for the practitioner\'s conclusion and should be expressed in positive form p. an assurance engagement in which the practitioner reduces engagement risk to a level that is acceptable in the circumstances of the engagement but where that risk is greater than for a reasonable assurance engagement in positive form 15. Gifts and hospitality are: q. familiarity threat and advocacy threat r. **self-interest and familiarity threat** s. self-review and familiarity threat 16. The statutory audit of financial statements in Poland results from: t. provisions of the Act of 27 August 2009 on Public Finance u. the provisions of the Act of 11 May 2017 on Statutory Auditors, Audit Firms and Public Oversight v. **provisions of the Act of 29 September 1994 on Accounting** 17. The level of executive materiality depends on the level of risk of material misstatement: w. the higher the risk of material misstatement, the higher the adopted level of executive materiality should be x. the lower the risk of material misstatement, the lower the adopted level of executive materiality should be y. **the higher the risk of material misstatement, the lower the adopted level of executive materiality should be** 18. Indicate the true sentence referring to tests (procedures): z. The auditor\'s confidence in the internal control system does not affect the sample size in substantive testing. a. **The greater the auditor\'s confidence in the internal control system, the more auditor can afford limitations on the sample size for substantive testing.** b. The less confidence the auditor has in the internal control system, the more auditor can afford to limit the sample size for substantive testing.