Financial Accounting - auditing

  • Created by: charlie
  • Created on: 14-01-17 17:17
What is an audit?
Quality control on the financial statements of a company (DOESNT prepare themselves)
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3 Audit objectives
(1) obtain understanding about reliability (due to fraud/error) (2) report on financial statements and communicate (3) when reasonable assurance not obtained and insufficient qualified opinion of auditor (auditor disclaims opinion and resigns)
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4 Reasons why are external audits performed
(1) protect owners (SH) of company (2) assess credibility of accounts for use in investment decisions (3) insurance policy against undetected problems (4) assess quality of accounting system and internal controls
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Who can audit?
Companies act (2006): (1) must register with recognised supervised body (RSB) and eligible for appointment under rules of RSB (2) can't be a officer or employee of company
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How to appoint an auditor
At annual general meeting except (1) directors may appoint first auditors or auditors to fill casual vacant (2) secretary of state may appoint if neither have done so
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How to remove an auditor
(1) by ordinary resolution (shareholders vote) (2) company must send copy of resolution to existing auditor (auditor has right to circulate) (3) auditor removed has right to attend AGM to which term would have expired
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Auditors report 1: title
Independent auditors report...
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Auditors report 2: addresse the members of XYZ plc
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Auditors report 3: opening intro
(1) identification of financial statements audited (2) statement of responsibility of entities management and auditor
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Auditors report 4: scope paragraph (describing nature of audit)
range of things included in Audit (1) reference to ISA's/ relevant national standards practice (2) description of work auditor performed
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Auditors report 5: opinion paragraph
(1) reference to framework used to prepare statements (IFRS) (2) expression of opinion on statements
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Auditors report 6: date of report, auditors address and signature
as obsolescence may occur after the date of the report
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Audit opinions 1: unqualified
financial statements give a true and fair view
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Audit opinions 2: adverse
financial statements do not give a true and fair view (BIG materiality and pervasiveness)
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Audit opinions 3: qualified (disagreement)
'except for...' where something is wrong and impact of correcting error is given, we can give a true and fair view (SMALL materiality and pervasiveness)
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Audit opinions 4: disclaimer
limited evidence and BIG materiality and pervasiveness: not saying a/c is wrong but because can't collect sufficient evidence, can't give opinion on whether true and fair
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Audit opinions 5: qualified (limitation of scope)
limited evidence and SMALL materiality and pervasiveness: '...except for any adjustments that might have been found is obtained sufficient evidence...' wed be able to say they give a true and fair view.
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Audit risk definition
risk that auditors may give an inappropriate audit opinion on the financial statements
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Audit risk equation
= Inherent risk (company) x Control risk (company) x Detection risk (auditor)
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Audit risk: inherent risk (company) definition and causes
probability of an error occurring/ e.g. director integrity, management experience, market expectations, complexity of transitions, items in a/c requiring adjustments, industry regulation changes
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Audit risk: control risk (company) definition, objectives and limitations
probability that an error gets through internal controls without being detected/ objectives (protect assets/proper authorisation/ transactions accurately recorded) limitations (cost shouldn't exceed benefit, human error, fixed process, old over time)
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Assertions: COVED
Completeness (all transactions in period been reported) Ownership (A/L controlled or owned - substance over form) Valuation (appropriately measured) Existence (reported transactions occurred) Disclosure (properly classified and presented GAAP)
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Auditors perform 2 things...
(1) Tests of control and (2) Substantive procedure (inspection/ observation/ enquiry and confirmation/ computation/ analytical procedures (ratio analysis))
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Audit tests used to... and needs to be...
(1) achieve audit objectives (broken down into verification of each assertion for each element) (2) communicate with sufficient precision so audit junior conducting tests could do so without further info
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Generic tests (address all assertions - perform analytical review/ ratio analysis)
Completeness (walk through tests - sample documents) Ownership (vouch to documents of titles- purch invoice) Valuation (inspect impairment) Existence (select sample and agree to documents) Disclosure (complete accounting standards checklist)
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Cut off tests
Completeness testing (test all transactions occurring just before year end included) Existence testing (test all transactions occurring after the year excluded)
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E.g. Audit of inventory: Completeness tests
(1) Stock take (physical to stock sheet counts) (2) Main audit (agree inventory at stock take with final) (3) cut off testing (sample goods)
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E.g. Audit of inventory: Ownership tests
(1) written confirmation by 3rd parties
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E.g. Audit of inventory: Valuation tests
(1) Stock take (for costs/ inventories provision) (2) main audit (cast final inventories listing and agree in accounts, look at NRV, note obsolescence inventory provision)
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E.g. Audit of inventory: Existence tests
(1) Stock take (stock sheet to physical count) (2) Main audit (sample from inventories and agree to stock sheets) (3) cut off testing (sample)
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E.g. Audit of inventory: Disclosure
ensure accounting policies adopted in measuring inventories, including cost formula disclosed
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E.g Audit of PPE
DOCUMENTS: title/ PPE register TESTS: physical count/ ownership documents/ receipts
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E.g Audit of TR
DOCUMENTS: sales invoice/ledger credit notes TESTS: cut off/ cash-after-date
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E.g Audit of Cash
DOCUMENTS: bank statement tests TESTS: obtain bank letter
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E.g Audit of TP
DOCUMENTS: purch invoice/ ledger receipt notes TESTS: cut off/ review post year end cash payments
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E.g. Going concern
DOCUMENTS: cash flow budgets/ forecasted statements TESTS: review budgets and forecasts for consistency with knowledge of the business LOOK FOR: negative CF/ redundancies/ reduced dividends/ sales of NCA
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Compliance testing (tests of control) 3 procedures:
(1) collect info on systems of internal control (2) document systems (3) conduct compliance tests to determine effectiveness of control
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Compliance testing 1. collecting info
interview individuals/ questionnaires
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Compliance testing 2. documenting info
flow charts/ narrative description/ both
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Compliance testing 3. 5 compliance tests
(1) walk through tests (select documents from different stages) (2) block tests (test specific aspect) (3) Observation (4) re-performance of control procedures (5) examination of evidence of management reviews
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Compliance testing: flow charts advantages
(1) best way to communicate systems in complex situations (2) forces preparer to fully understand system (3) may pinpoint unnecessary procedures or documents
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Compliance testing: flow charts disadvantages
(1) time consuming to prepare (2) may not be appropriate for simple systems (3) wide variation of symbols used (4) need experience to prepare/ interpret properly
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matter is material if its omission or misstatement would influence the decisions of an addresse of the auditors report
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Other cards in this set

Card 2


3 Audit objectives


(1) obtain understanding about reliability (due to fraud/error) (2) report on financial statements and communicate (3) when reasonable assurance not obtained and insufficient qualified opinion of auditor (auditor disclaims opinion and resigns)

Card 3


4 Reasons why are external audits performed


Preview of the front of card 3

Card 4


Who can audit?


Preview of the front of card 4

Card 5


How to appoint an auditor


Preview of the front of card 5
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