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ACCA Paper F8: AUDIT AND ASSURANCE Questions and Answers Published by Tony Surridge Online Limited in 2013

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DOWNLOAD SAMPLE Welcome to our download sample of the Tony Surridge +AddVance E-book publication:

ACCA Paper F8 – Audit and Assurance – Questions and Answers Thanks for taking time to review a download extract of this Questions and Answers publication which we have developed specially for the ACCA Paper F8: Audit and Assurance. We hope you like our electronic study material and recognise that at our affordable prices the complete purchased and downloaded version represents true value for money. This is only a small sample, taken directly from the full version. This sample shows our table of contents outlining all the Questions and Answers available in the full version, and a small selection of the types of Questions and Answers you can expect to find within. As an addition to this particular +AddVance Ebook we are also proving linkages to ISAs, Corporate Governance Codes and Professional Ethics Codes, as well as a Glossary of Terms. Due to the fact that this is only a demonstration, most of the hyperlinks currently shown here in the table of contents will not be active. All hyperlinks are fully functional only in the full downloaded version when purchased. You may like to learn some statistics about the full version: (please note these details may vary slightly depending on which updated version you have purchased)

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Short ISA Questions and Answers:

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+AddVance Study Material ACCA Paper F8 AUDIT AND ASSURANCE (International)

Main Page Copyright statement Environmental notice For the ladies only Test your knowledge now!

Syllabus

Questions & Answers

Study Guide

The structure of the syllabus Intellectual levels Learning hours Guide to exam structure Guide to examination assessment Aim Main capabilities Relational diagram of main capabilities Rationale Detailed syllabus Approach to examining the syllabus

A B C D E F G

Audit framework and regulation Internal audit Planning and risk assessment Internal control Audit evidence Review Reporting

Contents Main Contents Contents:

Multiple Choice Questions and Answers

Contents:

ISA Short Questions and Answers

Contents:

Diagnostic Questions and Answers

Contents:

Exam Status Questions and Answers

Contents:


Appendix A:

International Standards on Auditing

Appendix B:

Glossary

Note:

Means that the link has been made active for the free sample.

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I ask any lady reading these questions, answers and tutorial notes to be patient with my occasional use of the masculine pronoun in referring to the ‘manager’, the ‘member of staff’, the ‘planner’, and any other dramatis personae of the text, which I have used simply for grammatical convenience. I have a personal view that all general terms used in life, such as ‘man in the street’, ‘manning the office’, ‘manpower’, ‘man-made’ and so on should be de-masculinised as much as possible. This is not always easy when one is writing free-flowing text. Thank you. Tony Surridge



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TEST YOUR KNOWLEDGE NOW! Take a few minutes to see if you have remembered important points from the syllabus. Test yourself. Aim to reach a high score.

If you don’t have a lot of study time (you may be studying other subjects as well) but want to excel in the exams, the DIAGNOSTIC TEST designed for PAPER F8 helps you to: 1.

Get the BIG PICTURE without spending hours pouring over lengthy study text and manuals.

2.

Find ANSWERS QUICKLY.

3.

BRUSH UP your knowledge.

4.

ZOOM IN just before your exam.

5.

REVISE QUICKLY and more efficiently.

Exam questions consist of a number of short questions. Practice short questions to build up your knowledge base.

Within this set of DIAGNOSTIC TESTS you will find: 1.

HUNDREDS of additional problems with answers provided.

2.

STEP-BY-STEP SOLUTIONS for questions involving calculations.

3.

INFORMATION you need to know in a handy and succinct form

"Just look down the road and tell me if you can see either of them." I see nobody on the road." said Alice. I only wish I had such eyes, "the King remarked in a fretful tone. "To be able to see Nobody! And at such a distance too!" Lewis Carroll Alice in Wonderland John Tenniel's illustration of the King and Queen of Hearts at the trial of the Knave of Hearts. ©Tony Surridge Online Limited, 2013


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ACCA Paper F8 syllabus: Map of the Diagnostic Tests The Audit and Assurance syllabus is essentially divided into seven areas. The Tony Surridge +AddVance ebook of Diagnostic Questions and Answers is based on the ACCA syllabus and contains the following seven sections: 1. 2. 3. 4.

The concept of audit and other assurance engagements Statutory audits The regulatory environment and corporate governance Professional ethics and ACCA’s Code of Ethics and Conduct

1. 2. 3. 4. 5.

Internal audit and corporate governance Differences between external and internal audit The scope of the internal audit function Outsourcing the internal audit department Internal audit assignments

1. 2. 3. 4. 5. 6. 7.

Objective and general principles Understanding the entity and knowledge of the business Assessing the risks of material misstatement and fraud Analytical procedures Planning an audit Audit documentation The work of others

1. 2. 3. 4. 5. 6.

Internal control systems The use of internal control systems by auditors Transaction cycles Tests of control The evaluation of internal control components Communication on internal control

1. 2. 3. 4. 5. 6.

The use of assertions by auditors Audit procedures The audit of specific items Audit sampling and other means of testing Computer-assisted audit techniques Not-for-profit organisations

REVIEW

1. 2. 3. 4.

Subsequent events Going concern Management representations Audit finalisation and the final review

REPORTING

1. 2. 3.

Audit reports Reports to management Internal audit reports

AUDIT FRAMEWORK AND REGULATION

INTERNAL AUDIT

PLANNING AND RISK ASSESSMENT

INTERNAL CONTROL

AUDIT EVIDENCE



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Section A: AUDIT FRAMEWORK AND REGULATION

1. The concept of audit and other assurance engagements 2. Statutory audits 3. The regulatory environment and corporate governance 4. Professional ethics and ACCA’s Code of Ethics and Conduct



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Question 1 Paragraph A15, ISA 200 states ’Part A of the IFAC Code establishes the fundamental principles of professional ethics relevant to the auditor when conducting an audit of financial statements and provides a conceptual framework for applying those principles. The fundamental principles with which the auditor is required to comply by the IFAC Code are: (a)

Integrity;

(b)

Objectivity;

(c)

Professional competence and due care;

(d)

Confidentiality; and

(e)

Professional behaviour’.

A

Consistent with achieving the fundamental principles is for a Chartered Certified Accountancy firm to set its objective on providing professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through A

Compliance with International Financial Reporting Standards (IFRSs)

B

Continuing professional education.

C

A system of quality control.

D

A system of peer review.

Question 2

A

Which is not correct concerning the word “will” in the ISA 200 guidance? A

Paragraph A44, ISA 200 states ‘….. Accordingly, some detection risk will always exist’.

B

Paragraph A56, ISA 200 states ‘The auditor will also conduct the audit in accordance with both ISAs and auditing standards of a specific jurisdiction or country’.

C

Paragraph A39, ISA 200 states ‘…. . Accordingly, some control risk will always exist’.

D

Paragraph A55, ISA 200 states ‘In performing an audit, the auditor may be required to comply with legal or regulatory requirements in addition to the ISAs. The ISAs do not override law or regulation that governs an audit of financial statements. In the event that such law or regulation differs from the ISAs, an audit conducted only in accordance with law or regulation will not automatically comply with ISAs’. (Note: the print emphasis is not part of the standard.)

Note:

The first 10 Questions and Answers have been made active for the free sample.



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Question 3

A

Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterises the mind-set that the audit team should maintain during this discussion? A

Questioning.

B

Judgmental.

C

Presumptive.

D

Criticising.

Question 4

A

Because an examination of evidence is influenced by the possibility of material errors, the auditor should conduct the examination with an attitude of A

Professional responsiveness.

B

Conservative advocacy.

C

Objective judgment.

D

Professional skepticism.

A

Question 5 An independent chartered certified accountant auditor must have which of the following? A.

A pre-existing and well-informed point of view with respect to the audit.

B.

Technical training that is adequate to meet the requirements of a professional.

C.

A background in many different disciplines.

D.

Experience in taxation that is sufficient to comply with International Standards on Auditing (ISAs).

Question 6

A

An independent audit aids in the communication of economic data because the audit A

Lends credibility to the financial statements.

B

Assures the reader of financial statements that any fraudulent activity has been corrected.

C

Confirms the accuracy of management's financial representations.

D

Guarantees that financial data are fairly presented.



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Question 7

A

An chartered certified accountant auditor should comply with applicable IASs on every engagement A

Except in examinations that result in a qualified report.

B

Except in engagements where the chartered certified accountant auditor is associated with unaudited financial statements.

C

Except in examinations of interim financial statements.

D

Without exception.

Question 8

A

Which of the following best describes the reason why an independent auditor reports on financial statements? A

A management fraud may exist and is more likely to be detected by auditors.

B

Different interests may exist between the company preparing the statements and the persons using the statements.

C

A misstatement of account balances may exist and is generally corrected as the result of the auditor's work.

D

Poorly designed internal control may exist.

Question 9

A

Independent auditing can best be described as A

A branch of accounting.

B

A discipline that attests to the results of accounting and other functional operations and data.

C

A professional activity that measures and communicates financial and business data.

D

A regulatory function that prevents the issuance of improper financial information.

Question 10

A

What actions should the auditor take when the two-way communication between the auditor and those charged with governance is not adequate and the situation cannot be resolved.



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Question 11 Which of the following matters is an auditor required to communicate to those charged with governance? A

Adjustments that were suggested by the auditor and recorded by management that have a significant effect on the entity's financial reporting process.

B

The auditor's consideration of risk factors in assessing the risk of material misstatement arising from the misappropriation of assets.

C

The results of the auditor's analytical procedures performed in the review stage of the engagement that indicate significant variances from expected amounts.

D

Changes in the auditor's preliminary judgment about materiality that were caused by projecting the results of statistical sampling for tests of transactions.

Question 12 During the audit of a new client, the chartered certified accountant auditor determined that management had given illegal bribes to local-government officials during the year under audit and for several prior years. The auditor notified the client's board of directors, but the board decided to take no action because the amounts involved were immaterial to the financial statements. Under these circumstances, the auditor should: A

Add an explanatory paragraph emphasizing that certain matters, while not affecting the unqualified opinion, require disclosure.

B

Report the illegal bribes to the local-government official at least one level above those persons who received the bribes.

C

Consider withdrawing from the audit engagement and disassociating from future relationships with the client.

D

Issue an "except for" qualified opinion or an adverse opinion with a separate paragraph that explains the circumstances.

Question 13

Disagreements regarding management's judgment about accounting estimates for goodwill.

B

Disagreements about the scope of the audit.

C

Disagreements in the application of accounting principles relating to software development costs.

D

Disagreements of the amount of the inventory level based on preliminary information.



A

A

Which of the following disagreements between the auditor and management do not have to be communicated by the auditor to those charged with governance? A

A

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Question 14

A

Which of the following statements best describes why the ACCA has deemed it essential to promulgate a ‘Code of Ethics and Conduct’ and to establish a mechanism for enforcing observance of the code? A

A distinguishing mark of a profession is to advance the public interest..

B

A prerequisite to success is the establishment of an ethical code that stresses primarily the professional's responsibility to clients and colleagues.

C

A requirement of most jurisdictions’ laws calls for the profession to establish a code of ethics.

D

An essential means of self-protection for the profession is the establishment of flexible ethical standards.

Question 15

A

The ACCA’s ‘Code of Ethics and Conduct’ states, in part, that an ACCA member should maintain integrity and objectivity. Objectivity in the code refers to an ACCA member’s ability A

To maintain an impartial attitude on all matters which come under the ACCA member’s review.

B

To independently distinguish between accounting practices that are acceptable and those that are not.

C

To be unyielding in all matters dealing with auditing procedures.

D

To independently choose between alternate accounting principles and auditing standards.

Question 16 Upon discovering irregularities in a client's tax return that the client would not correct, a chartered certified accountant auditor withdraws from the engagement. How should the chartered certified accountant auditor respond if asked by the successor auditor why the relationship was terminated? A

"It was a misunderstanding."

B

"I suggest you get the client's permission for us to discuss all matters freely."

C

"I suggest you ask the client."

D

"I found irregularities in the tax return which the client would not correct."

Question 17

A

An ACCA member’s retention of client records as a means of enforcing payment of an overdue audit fee is an action that is A

Considered acceptable by the ACCA’s ‘Code of Ethics and Conduct’.

B

Ill-advised since it would impair the ACCA auditor’s independence with respect to the client.

C

Considered discreditable to the profession.

D

A violation of International Standards on Auditing (IASs).



A

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Question 18

A

In which of the following circumstances would an ACCA member who audits CAS Company lack independence? A

The ACCA member and CAS’s chairman are both on the board of directors of DEF Company.

B

The ACCA member and CAS’s chairman each owns 25% of PQR Company, a ‘close’ company.

C

The ACCA member has a home mortgage from CAS, which is a savings and loan organisation.

D

The ACCA member reduced CAS’s usual audit fee by 40% because CAS’s financial condition was unfavorable.

Question 19

A

A client company has not paid its 2011 audit fees. According to the ACCA’s ‘‘Code of Ethics and Conduct’, for the auditor to be considered independent with respect to the 2012 audit, the 2011 audit’s fees must be paid before the A

2011 report is issued.

B

2012 field work is started.

C

2012 report is issued.

D

2013 field work is started.

Question 20

A

Section 3.5 of the ACCA’s ‘‘Code of Ethics and Conduct’ states that ACCA ‘Members acquiring information in the course of their professional work should not disclose any such information to third parties without first obtaining permission from their clients’. Section 3.5 goes on to state ‘There are, however, circumstances where members may disclose information to third parties without first obtaining permission’. This rule precludes (prevents) the ACCA member responding in the following situation: A

Where a member is served with a court order under which they are obliged to disclose information.

B C

To disclose certain information to the liquidator, administrative receiver or administrator of a client. To whistleblow to regulators.

D

To disclose information required by the client’s principal shareholder.

Question 21 An ACCA member wrote an article for publication in a professional journal. The ACCA’s ‘Code of Ethics and Conduct’ would be violated if the ACCA member allowed the article to state that the ACCA member was A

A member of the ACCA.

B

A professor at a school of professional accountancy.

C

A partner in a national ACCA firm.

D

None of these.



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Question 22

A

During the course of an audit in the United Kingdom, the client's controller asks you if you would like to spend the weekend in New York (USA) as the company's guest. How should you respond? A

Go and enjoy yourself.

B

Explain to the client that under the ACCA’s ‘Code of Ethics and Conduct’ you must maintain your independence so it will be necessary to schedule some appropriate business activities.

C

Explain that under the ACCA’s ‘Code of Ethics and Conduct’ you cannot accept anything of significant value from a client.

D

Explain that under the ACCA’s ‘Code of Ethics and Conduct’ that this type of activity is prohibited.

Question 23 An ACCA member, while performing an audit, strives to achieve independence in appearance in order to A

Reduce risk and liability.

B

Comply with the ISAs of audit work.

C

Become independent in fact.

D

Maintain public confidence in the profession.

Question 24

A

Professional competence and due care requires A

A critical review of the audit work done at every level of supervision.

B

The examination of all corroborating evidence available.

C

The exercise of error free judgment.

D

A study and review of the internal control’s that include tests of controls.

Question 25

A

According to the ACCA’s ‘‘Code of Ethics and Conduct’ in which of the following circumstances may an chartered certified accountant auditor serve on a company's board of directors? A

The chartered certified accountant audits a bank to which the company has applied for financing, and board approval is required for said financing to occur.

B

The chartered certified accountant auditor is asked by the company to test the internal controls of the company and offers compensation to the ACCA member for said services.

C

The chartered certified accountant auditor does not audit the company and has no other business connection with the company.

D

The chartered certified accountant auditor performs auditing services for a nonpublic company.



A

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Question 26

A

In which of the following situations is there a violation of client confidentiality under the ACCA’s ‘‘Code of Ethics and Conduct’ ? A

A member discloses confidential client information to a court in connection with arbitration proceedings relating to the client.

B

A member discloses confidential client information to a professional liability insurance carrier after learning of a potential claim against the member.

C

A member whose practice is primarily bankruptcy discloses a client's name.

D

A member uses a records retention agency to store clients' records that contain confidential client information.

Question 27

A

Debbie Jones, an ACCA member, is a partner of Green & Jones Accounting Firm. Green audited the books of Northtown Bank. Jone’s independence would be impaired under which of the following circumstances? A

Jones is a director of Northtown Bank.

B

Jones has a collateralised car loan with Northtown Bank.

C

Jones had an account with Northtown Bank two years ago.

D

Jones and a Northtown Bank board member belong to the same church.

"And how many hours a day did you do lessons?' said Alice, in a hurry to change the subject. Ten hours the first day,' said the Mock Turtle: 'nine the next, and so on.' What a curious plan!' exclaimed Alice. That's the reason they're called lessons,' the Gryphon remarked: 'because they lessen from day to day." Lewis Carroll Alice's Adventures in Wonderland and Through the LookingGlass



Original illustrations from Alice's Adventures in Wonderland, drawn by John Tenniel Alice in Wonderland Alice dancing with Mock Turtle and Gryphon

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Q

Answer to Question 1 C The question is about how a chartered certified accountancy firm obtains a reasonable assurance of providing professional services that conform with professional standards. Answer C is correct because a system of quality control is designed to provide a chartered certified accountancy firm with reasonable assurance of meeting its responsibility to provide professional services that conform with professional standards. Distractor A is incorrect because complying with International Financial Reporting Standards (IFRSs) is only one part of the basic objective of providing professional services that conform with professional standards. Distractor B is incorrect because it is less complete than Distractor C since continuing professional education is part of the firm’s system of quality control. Distractor D is incorrect because a peer review provides feedback on whether a chartered certified accountancy firm is following an appropriate system of quality control.

Q

Answer to Question 2

To access ISA 200 click here

B

The question is about identifying the incorrect statement of the word “will” concerning the ISA 200 guidelines. Answer B is correct because paragraph A56, ISA 200 states ‘The auditor may also conduct the audit in accordance with both ISAs and auditing standards of a specific jurisdiction or country. In such cases, in addition to complying with each of the ISAs relevant to the audit, it may be necessary for the auditor to perform additional audit procedures in order to comply with the relevant standards of that jurisdiction or country’. The implication of the statement that it may not be necessary for the auditor to perform the additional audit procedures. Distractors A, C and D are incorrect because the word “will” is used correctly in each paragraph of ISA 200 referred to. Distractor A. Paragraph A44, ISA 200 states ‘ISA 300 and ISA 330 establish requirements and provide guidance on planning an audit of financial statements and the auditor’s responses to assessed risks. Detection risk, however, can only be reduced, not eliminated, because of the inherent limitations of an audit. Accordingly, some detection risk will always exist’. Distractor C. Paragraph A39, ISA 200 states ‘Control risk is a function of the effectiveness of the design, implementation and maintenance of internal control by management to address identified risks that threaten the achievement of the entity’s objectives relevant to preparation of the entity’s financial statements. However, internal control, no matter how well designed and operated, can only reduce, but not eliminate, risks of material misstatement in the financial statements, because of the inherent limitations of internal control. These include, for example, the possibility of human errors or mistakes, or of controls being circumvented by collusion or inappropriate management override. Accordingly, some control risk will always exist. The ISAs provide the conditions under which the auditor is required to, or may choose to, test the operating effectiveness of controls in determining the nature, timing and extent of substantive procedures to be performed’. Distractor D. Paragraph A55, ISA 200 states ‘In performing an audit, the auditor may be required to comply with legal or regulatory requirements in addition to the ISAs. The ISAs do not override law or regulation that governs an audit of financial statements. In the event that such law or regulation differs from the ISAs, an audit conducted only in accordance with law or regulation will not automatically comply with ISAs’.



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Q

A The question is about identifying the mind-set that the audit team should maintain during initial discussions concerning an audit engagement. Answer A is correct. Paragraph A69, ISA 200 states ’ …. this ISA requires the auditor to adopt an attitude of professional skepticism; this is necessary in all aspects of planning and performing an audit’. During an audit, the auditor should maintain an attitude of professional skepticism, which includes a questioning mind and a critical assessment of audit evidence. Distractor B is incorrect because judgement is not as important as professional skepticism in the early discussions. Distractor C is incorrect because ’to take true without examination’ would be the wrong approach. Distractor D is incorrect because to ‘disapprove’ would also be wrong at this early stage.


Q

D The question is about identifying the attitude required of the auditor during the examination of audit evidence. Answer D is correct because paragraph A20, ISA 200 states ‘Professional skepticism is necessary to the critical assessment of audit evidence. This includes questioning contradictory audit evidence and the reliability of documents and responses to inquiries and other information obtained from management and those charged with governance. It also includes consideration of the sufficiency and appropriateness of audit evidence obtained in the light of the circumstances, for example in the case where fraud risk factors exist and a single document, of a nature that is susceptible to fraud, is the sole supporting evidence for a material financial statement amount’. Distractor A is incorrect because although the auditor needs to be receptive or aware (i.e. responsive’) this is not as important as professional skepticism which helps to develop receptiveness or awareness. Distractor B is incorrect because conservative advocacy (support for traditionalism or low risk) is not appropriate. Distractor C is not correct because objectivity (impartiality or detachment) is part of skeptisicism.



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Answer to Question 5 B

Q

The question is about identifying the technical knowledge and background required of an independent chartered certified accountant auditor. Answer B is correct. Paragraph A24, ISA 200 states ‘The distinguishing feature of the professional judgment expected of an auditor is that it is exercised by an auditor whose training, knowledge and experience have assisted in developing the necessary competencies to achieve reasonable judgments’. Distractor A is incorrect. The independent auditor should maintain an attitude of professional skepticism – an unbiased and objective view with respect to the audit which goes against forming pre-existing and well-informed points of view. Distractor C is incorrect. An auditor does not need to have a background in many different disciplines. The auditor must have adequate technical training and proficiency as an auditor and can take advantage of using ‘The work of an auditor’s expert’ Refer to ISA 620. Distractor D is incorrect. Generally ISAs do not require the independent auditor to have experience in taxation; rather the auditor must have adequate technical training and experience as an auditor and be able to use the work of experts as necessary.

Answer to Question 6 A

Q The question is about identifying the main objective of an independent audit of historic financial statements. Answer A is correct. Paragraph 11, ISA 200 states ‘In conducting an audit of financial statements, the overall objectives of the auditor are: (a)

To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and

(b)

To report on the financial statements, and communicate as required by the ISAs, in accordance with the auditor’s findings’.

Paragraph A16, ISA 200 states ‘In the case of an audit engagement it is in the public interest and, therefore, required by the IFAC Code, that the auditor be independent of the entity subject to the audit. The IFAC Code describes independence as comprising both independence of mind and independence in appearance. The auditor’s independence from the entity safeguards the auditor’s ability to form an audit opinion without being affected by influences that might compromise that opinion. Independence enhances the auditor’s ability to act with integrity, to be objective and to maintain an attitude of professional skepticism’. Distractor B is incorrect because the objective of the auditor is not to assure the reader of financial statements that any fraudulent activity has been corrected, which would suggest a 100% guarantee. For example, paragraph A47, ISA 200 states ‘Fraud may involve sophisticated and carefully organized schemes designed to conceal it. Therefore, audit procedures used to gather audit evidence may be ineffective for detecting an intentional misstatement that involves, for example, collusion to falsify documentation which may cause the auditor to believe that audit evidence is valid when it is not. The auditor is neither trained as nor expected to be an expert in the authentication of documents’. The answer continues on the next screen



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An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not given specific legal powers, such as the power of search, which may be necessary for such an investigation’.

Q

Distractor C is incorrect because the audit report does not confirm the accuracy of management's financial representations. Distractor D is incorrect because the word ‘guarantees’ implies 100% assurance which is not given by the audit report. Paragraph 45, ISA 200 states ‘The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial statements are free from material misstatement due to fraud or error. This is because there are inherent limitations of an audit, which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive’.


Q

D The question is about identifying when IASs should be used by a chartered certified accountant auditor. Answer D is correct. Paragraph 1, ISA 200 states ‘This International Standard on Auditing (ISA) deals with the independent auditor’s overall responsibilities when conducting an audit of financial statements in accordance with ISAs. Specifically, it sets out the overall objectives of the independent auditor, and explains the nature and scope of an audit designed to enable the independent auditor to meet those objectives. It also explains the scope, authority and structure of the ISAs, and includes requirements establishing the general responsibilities of the independent auditor applicable in all audits, including the obligation to comply with the ISAs’. Paragraph 2, ISA 200 goes on to state ‘ISAs are written in the context of an audit of financial statements by an auditor. They are to be adapted as necessary in the circumstances when applied to audits of other historical financial information. ISAs do not address the responsibilities of the auditor that may exist in legislation, regulation or otherwise in connection with, for example, the offering of securities to the public. Such responsibilities may differ from those established in the ISAs. Accordingly, while the auditor may find aspects of the ISAs helpful in such circumstances, it is the responsibility of the auditor to ensure compliance with all relevant legal, regulatory or professional obligations’. This statement does not imply that the auditor should not comply with applicable IASs. Distractors A, B and C are incorrect because ISAs should be complied with in each case.


Q

B The question is about identifying why an independent auditor reports on financial statements. Answer B is correct. Distractors A, C and D are incorrect because they can be dealt with by internal auditors.



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Q

The question is about describing the work of independent auditing. Answer C is correct. Paragraph 13(b), ISA 200 states that audit evidence is ‘Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial statements and other information. For purposes of the ISAs: (i)

Sufficiency of audit evidence is the measure of the quantity of audit evidence. The quantity of the audit evidence needed is affected by the auditor’s assessment of the risks of material misstatement and also by the quality of such audit evidence.

(ii)

Appropriateness of audit evidence is the measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is based’.

Paragraph 11, ISA 200 states ‘In conducting an audit of financial statements, the overall objectives of the auditor are: (a)


(b)


Distractor A is incorrect. Auditing is not a branch of accounting. Distractor B is incorrect. The independent auditor is concerned primarily with the financial system and financial reports and is not concerned with ‘other functional operations and data’. Distractor D is incorrect. The statement ‘A regulatory function that prevents the issuance of improper financial information’ suggests a 100% assurance which is not the aim of the independent auditor. Paragraph A45, ISA 200 states ‘The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial statements are free from material misstatement due to fraud or error. This is because there are inherent limitations of an audit, which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive’ [i.e. convincing] ‘rather than conclusive’.


Q

Paragraph A44, ISA 260 states ‘If the two-way communication between the auditor and those charged with governance is not adequate and the situation cannot be resolved, the auditor may take such actions as: • • •

•

Modifying the auditor’s opinion on the basis of a scope limitation. Obtaining legal advice about the consequences of different courses of action. Communicating with third parties (for example, a regulator), or a higher authority in the governance structure that is outside the entity, such as the owners of a business (for example, shareholders in a general meeting), or the responsible government minister or parliament in the public sector. Withdrawing from the engagement, where withdrawal is possible under applicable law or regulation’.



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ISA 200 To access the ISA click here Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing

Note:




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Question 1

A

What are the stated overall objectives of ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing?

Question 2

A

For purposes of the ISAs, different terms have meanings attributed. In terms of the ISAs define the following: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv)

Applicable financial reporting framework. Audit evidence Audit risk Auditor Detection risk Financial statements Historical financial information Management. Misstatement Premise Professional judgement Professional skepticism Reasonable assurance Risk of material misstatement Those charged with governance

Question 3 Law or regulation may establish the responsibilities of management and, where appropriate, those charged with governance in relation to financial reporting. However, the extent of these responsibilities, or the way in which they are described, may differ across jurisdictions. Despite these differences, an audit in accordance with ISAs is conducted on the premise that management and, where appropriate, those charged with governance have acknowledged and understand that they have three responsibilities. What are these responsibilities.

Question 4

A

Paragraph 15, ISA 200, states that the auditor ‘shall plan and perform an audit with professional skepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated’. Give four examples of what professional skepticism includes the auditor being alert to.

Question 5

A

Paragraphs A19, ISA 200 requires the auditor to maintain professional skepticism throughout the audit to reduce three risks. What are these risks?

Question 6

A

Paragraph A34, ISA 200, states that ‘the risks of material misstatement may exist at two levels’. What are they?



A

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Question 7

A

Para A37, ISA 200, states that ‘The risks of material misstatement at the assertion level consist of two components: inherent risk and control risk. Inherent risk and control risk are the entity’s risks; they exist independently of the audit of the financial statements’. Explain the terms: (i) (ii)

‘inherent risk’ ‘control risk’.

Question 8

A

Paragraphs A42 and A43, ISA, state ‘For a given level of audit risk, the acceptable level of detection risk bears an inverse relationship to the assessed risks of material misstatement at the assertion level. For example, the greater the risks of material misstatement the auditor believes exists, the less the detection risk that can be accepted and, accordingly, the more persuasive the audit evidence required by the auditor. Detection risk relates to the nature, timing, and extent of the auditor’s procedures that are determined by the auditor to reduce audit risk to an acceptably low level. It is therefore a function of the effectiveness of an audit procedure and of its application by the auditor’. Briefly give four examples of matters that assist the auditor to enhance the effectiveness of an audit procedure and of its application and reduce the possibility that the auditor might select an inappropriate audit procedure, misapply an appropriate audit procedure, or misinterpret the audit results.

Question 9 Paragraph A45, ISA 200, states that ‘The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial statements are free from material misstatement due to fraud or error. This is because there are inherent limitations of an audit, which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive’. ISA 200 gives three matters from which the inherent limitations of an audit arise. What are the three inherent limitations?

Question 10

A

Paragraph A48, ISA 200, states that ‘.... the relevance of information, and thereby its value, tends to diminish over time, and there is a balance to be struck between the reliability of information and its cost’. Briefly discuss the implications of this statement for the auditor.

Question 11

A

Parapgraph A55, ISA 200 states ‘In performing an audit, the auditor may be required to comply with legal or regulatory requirements in addition to the ISAs.’ What are the implications for the auditor in the event that such law or regulation differs from the ISAs?

Question 12

A

Paragraph A58, ISA 200, lays out the contents of a typical ISA. What are the main contents of an ISA?



A

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Question 13

A

Paragraph A71, ISA 200 states that ‘The auditor is required to use the objectives to evaluate whether sufficient appropriate audit evidence has been obtained in the context of the overall objectives of the auditor’. What actions or procedures should the auditor perform when he or she concludes that the audit evidence is not sufficient and appropriate?

Question 14

A

Are all ISAs relevant for an audit?

Question 15

A

True or False? (i)

Sufficiency of audit evidence is the measure of the quality of audit evidence.

(ii)

Appropriateness of audit evidence is the measure of the quantity of audit evidence.

(iii)

Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk.

(iv)

Detection risk is the risk that the procedures performed by the auditor to increase audit risk to an acceptably high level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.

(v)

A misstatement is a difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can arise from error but not from fraud.

(vi)

ISA 200 defines professional judgements as ‘An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence’.

(vii)

The risk of material misstatement is the risk that the financial statements are materially misstated prior to audit.

(viii) The risk of material misstatement consists of two components, described as follows (1) inherent risk and (2) detection risk.



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ISA 200 To access the ISA click here Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing



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Q

Paragraph 11, ISA 200 states ’ In conducting an audit of financial statements, the overall objectives of the auditor are: (a)


(b)



Q

Paragraph 13, ISA 200 states ’For purposes of the ISAs, the following terms have the meanings attributed below: (a)

Applicable financial reporting framework – The financial reporting framework adopted by management and, where appropriate, those charged with governance in the preparation of the financial statements that is acceptable in view of the nature of the entity and the objective of the financial statements, or that is required by law or regulation.

(b)

Audit evidence – Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial statements and other information. For purposes of the ISAs: -

Sufficiency of audit evidence is the measure of the quantity of audit evidence. The quantity of the audit evidence needed is affected by the auditor’s assessment of the risks of material misstatement and also by the quality of such audit evidence.

-

Appropriateness of audit evidence is the measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is based.

(c)

Audit risk – The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk.

(d)

Auditor – “Auditor” is used to refer to the person or persons conducting the audit, usually the engagement partner or other members of the engagement team, or, as applicable, the firm. Where an ISA expressly intends that a requirement or responsibility be fulfilled by the engagement partner, the term “engagement partner” rather than “auditor” is used. “Engagement partner” and “firm” are to be read as referring to their public sector equivalents where relevant.

(e)

Detection risk – The risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.

The answer continues on the next screen



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To access ISA 200 click here (f)

Financial statements – A structured representation of historical financial information, including related notes, intended to communicate an entity’s economic resources or obligations at a point in time or the changes therein for a period of time in accordance with a financial reporting framework. The related notes ordinarily comprise a summary of significant accounting policies and other explanatory information. The term “financial statements” ordinarily refers to a complete set of financial statements as determined by the requirements of the applicable financial reporting framework, but can also refer to a single financial statement.

(g)

Historical financial information – Information expressed in financial terms in relation to a particular entity, derived primarily from that entity’s accounting system, about economic events occurring in past time periods or about economic conditions or circumstances at points in time in the past.

(h)

Management – The person(s) with executive responsibility for the conduct of the entity’s operations. For some entities in some jurisdictions, management includes some or all of those charged with governance, for example, executive members of a governance board, or an ownermanager.

(i)

Misstatement – A difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud. Where the auditor expresses an opinion on whether the financial statements are presented fairly, in all material respects, or give a true and fair view, misstatements also include those adjustments of amounts, classifications, presentation, or disclosures that, in the auditor’s judgment, are necessary for the financial statements to be presented fairly, in all material respects, or to give a true and fair view.

(j)

Premise (relating to the responsibilities of management and, where appropriate, those charged with governance, on which an audit is conducted) – That management and, where appropriate, those charged with governance have acknowledged and understand that they have the following responsibilities that are fundamental to the conduct of an audit in accordance with ISAs. That is, responsibility: -

For the preparation of the financial statements in accordance with the applicable financial reporting framework, including where relevant their fair presentation;

-

For such internal control as management and, where appropriate, those charged with governance determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; and

-

To provide the auditor with: -

Access to all information of which management and, where appropriate, those charged with governance are aware that is relevant to the preparation of the financial statements such as records, documentation and other matters;

-

Additional information that the auditor may request from management and, where appropriate, those charged with governance for the purpose of the audit; and

-. Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence. The answer continues on the next screen



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Q

(k)

Professional judgment – The application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.

(l)

Professional skepticism – An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.

(m)

Reasonable assurance – In the context of an audit of financial statements, a high, but not absolute, level of assurance.

(n)

Risk of material misstatement – The risk that the financial statements are materially misstated prior to audit. This consists of two components, described as follows at the assertion level:

(o)

-

Inherent risk – The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.

-

Control risk – The risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.

Those charged with governance – The person(s) or organization(s) (for example, a corporate trustee) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting process. For some entities in some jurisdictions, those charged with governance may include management personnel, for example, executive members of a governance board of a private or public sector entity, or an owner-manager’.


Q

Paragraph A2, ISA 200 states ’…. an audit in accordance with ISAs is conducted on the premise that management and, where appropriate, those charged with governance have acknowledged and understand that they have responsibility: (a)

For the preparation of the financial statements in accordance with the applicable financial reporting framework, including where relevant their fair presentation;

(b)

For such internal control as management and, where appropriate, those charged with governance determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; and

(c)

To provide the auditor with: (i)

Access to all information of which management and, where appropriate, those charged with governance are aware that is relevant to the preparation of the financial statements such as records, documentation and other matters;

(ii)

Additional information that the auditor may request from management and, where appropriate, those charged with governance for the purpose of the audit; and

(iii)

Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence’.



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Q

Paragraph A18, ISA 200 states ’Professional skepticism includes being alert to, for example: • • • •

Audit evidence that contradicts other audit evidence obtained. Information that brings into question the reliability of documents and responses to inquiries to be used as audit evidence. Conditions that may indicate possible fraud. Circumstances that suggest the need for audit procedures in addition to those required by the ISAs’.


Q

Paragraph A19, ISA 200 states ’Maintaining professional skepticism throughout the audit is necessary if the auditor is, for example, to reduce the risks of: • • •

Overlooking unusual circumstances. Over generalizing when drawing conclusions from audit observations. Using inappropriate assumptions in determining the nature, timing, and extent of the audit procedures and evaluating the results thereof’.


Q

Paragraph A34, ISA 200 states ’The risks of material misstatement may exist at two levels: • •

The overall financial statement level; and The assertion level for classes of transactions, account balances, and disclosures.

Risks of material misstatement at the overall financial statement level refer to risks of material misstatement that relate pervasively to the financial statements as a whole and potentially affect many assertions. Risks of material misstatement at the assertion level are assessed in order to determine the nature, timing, and extent of further audit procedures necessary to obtain sufficient appropriate audit evidence. This evidence enables the auditor to express an opinion on the financial statements at an acceptably low level of audit risk’.

Answer to Question 7 (i)

As stated previously, ISA 200 defines ‘inherent risk’ as ‘The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls’. Paragraph A38, ISA 200 states ’ Inherent risk is higher for some assertions and related classes of transactions, account balances, and disclosures than for others. For example, it may be higher for complex calculations or for accounts consisting of amounts derived from accounting estimates that are subject to significant estimation uncertainty. External circumstances giving rise to business risks may also influence inherent risk. For example, technological developments might make a particular product obsolete, thereby causing inventory to be more susceptible to overstatement. Factors in the entity and its environment that relate to several or all of the classes of transactions, account balances, or disclosures may also influence the inherent risk related to a specific assertion. Such factors may include, for example, a lack of sufficient working capital to continue operations or a declining industry characterized by a large number of business failures’.



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(ii)

As stated previously, ISA 200 defines control risk as ‘The risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control

Q

Paragraph A39, ISA 200 states ’ Control risk is a function of the effectiveness of the design, implementation and maintenance of internal control by management to address identified risks that threaten the achievement of the entity’s objectives relevant to preparation of the entity’s financial statements. However, internal control, no matter how well designed and operated, can only reduce, but not eliminate, risks of material misstatement in the financial statements, because of the inherent limitations of internal control. These include, for example, the possibility of human errors or mistakes, or of controls being circumvented by collusion or inappropriate management override. Accordingly, some control risk will always exist. The ISAs provide the conditions under which the auditor is required to, or may choose to, test the operating effectiveness of controls in determining the nature, timing and extent of substantive procedures to be performed’.

Answer to Question 8 Paragraph A43, ISA 200 states ’Detection risk relates to the nature, timing, and extent of the auditor’s procedures that are determined by the auditor to reduce audit risk to an acceptably low level. It is therefore a function of the effectiveness of an audit procedure and of its application by the auditor. Matters such as: • • • •

Q

adequate planning; proper assignment of personnel to the engagement team; the application of professional skepticism; and supervision and review of the audit work performed,

assist to enhance the effectiveness of an audit procedure and of its application and reduce the possibility that an auditor might select an inappropriate audit procedure, misapply an appropriate audit procedure, or misinterpret the audit results’.

Answer to Question 9 Paragraph A45, ISA 200 states ’The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial statements are free from material misstatement due to fraud or error. This is because there are inherent limitations of an audit, which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive [credible] rather than conclusive [certain]. The inherent limitations of an audit arise from: • • •

The nature of financial reporting; The nature of audit procedures; and The need for the audit to be conducted within a reasonable period of time and at a reasonable cost’.



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Question 1

A

Independence The following are various services that accountants perform for clients. For each type of service, indicate which of them requires the accountant to be independent. Service: 1. 2. 3. 4. 5. 6.

Compilation Tax preparation Review Examination Audit Agreed upon procedures

A

Question 2 In a brief memo to a client, discuss the function of an audit of historical financial statements, including the assurance provided, the extent of evidence gathering, and whether independence is required. Your response in the exam will be graded for both technical content and writing skills. You should demonstrate your ability to develop, organise, and express your ideas. Do not convey information in the form of a table or abbreviated presentation. To From Subject

: : :

Client Accountant, ACCA The audit function as it relates to the assurance provided, the extent of evidence gathering, and whether independence is required.

Note:

The first 9 Questions and Answers have been made active for the free sample. Please write your answer on paper.

Signature ............

Question 3

A

Complete the IFAC's definition of an audit: The objective of an ............ of ............ ............ is to enable the auditor to ............ an ............ whether the financial statements are prepared, in all ............ respects, in accordance with an identified financial reporting framework. The phrases used to express the auditors' opinion are: 'give a ............ and ............ view' or '............ ............ in all material respects', which are equivalent terms.



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Question 4

A

Which of the following has a statutory obligation for an audit, in the UK. Type of organisation Large limited liability company Small sole trader Charities Building societies Housing associations Trade unions

A

Question 5 Put the following key stages of an audit in the correct sequence: Test the financial statements Assess the system and internal controls Determine the audit approach Express an opinion Test the system and internal controls Ascertain the system and controls Review the financial statements

Question 6

A

A partnership might benefit from having an audit though it is not required to do so by law. State five advantages of the partnership having an audit.

A

Question 7 The term ‘Financial statements’ typically include four basic financial statements. What are they?

A

Question 8 Define the following terms: 1. 2. 3. 4.

Disclosure Negative assurance Internal audit Audit assurance



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A

Question 9 True or false 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

National legislation has precedence over International Accounting Standards. What is included in the audited financial statements is determined largely by the entity's management. When involved in a 'Compilation Engagement' the accountant provides assurance about the matter in hand. A review is the same as an audit. By the end of an audit, an auditor may be able to certify that accounts are correct. The use of internal auditing is generally not a legal requirement Principal-agency theory (PAT) predicts that, by behaving rationally, management (the agents) are motivated to act in the interests of the shareholders (principals). The auditor ensures that the Audit Report is accurate at the time it is published. Auditors can rely on controls that are well designed. The student of auditing is going to enjoy studying this subject.

A

Question 10 List seven postulates of modern auditing. (The term postulate means 'premises' 'foundation' 'groundrules').

A

Question 11 Define corporate governance.

A

Question 12 Describe six features of poor governance.

Question 13

A

State five duties of the members of an Audit Committee.

Question 14

A

If the audit committee operates effectively it can bring significant benefits. List five such benefits. (note: the question refers to benefits and not aims).

Question 15

A

Discuss six aims of an audit committee.



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A

Question 16 Describe five types of regular reporting that would be useful for the functioning of the audit committee.

Question 17

A

Briefly indicate four requirements that an auditor needs to meet to be eligible to conduct a statutory audit in most jurisdictions.

Question 18

A

The auditor is regulated by four main regulatory bodies. Name them.

Question 19

A

The IFAC issues different categories of standards and guidelines. What do the following stand for: 1. 2. 3. 4.

ISAs IAPSs ISREs ISAEs

Question 20

A

There are different types of regulatory mechanisms affecting the operations of a company, of which the auditor needs to be aware. Describe five examples of such regulatory mechanisms.

A

Question 21 What is an 'Elective resolution'?

Question 22

A

The majority of companies are required by national law to have an audit. A key exemption generally given to this requirement is that given to small companies. List four characteristics of a small entity that would have some bearing on the auditing activity

Question 23 The need for an external audit arises primarily when the ownership and management of an entity are separated. There are possible advantages for a small private (limited liability) company in having financial statements audited even when no statutory requirement exists for such as audit. List five such advantages.

Question 24

A

Discuss five arguments in favour of a small entity having an audit in respect to the users of financial statements.

Question 25

A

Discuss five arguments against the statutory audit of small entities in respect to the users of financial statements.



A

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Question 26

A

True or false 1.

Exposure drafts of proposed IFAC standards are made available for public comment for at least 60 days.

2.

Private companies that are large enough to require an audit are required to lay out accounts annually.

3.

Members holding 10% of the nominal value of the issued capital of a private company which is not required to have a statutory audit, can require the accounts to be audited.

4.

The only occasion when directors have the right to appoint the auditor is to fill a casual vacancy.

5.

In the UK a simple majority of members (in meeting) is required to appoint an auditor.

6.

An auditor must be given at least 28 days of notice of removal by 'Special Notice to remove the auditor'.

7.

In the UK it is the auditor's responsibility to deposit a 'Statement of Circumstances' at the company's registered office within 14 days of ceasing to hold office.

8.

When an auditor ceases to hold office a 'Statement of Circumstances' must always be deposited by the auditor who is leaving the office.

9.

UK Companies Act, 2006 requires the directors to prepare a report with respect to the company's affairs. This report, as such, does not concern the auditor. UK legislation (Companies Act, The contents of an auditor's report is laid out in ISA 700. 2006) is used to exemplify legislation used in most jurisdictions.

10.

Question 27

A

The duties of an auditor require a report on every balance sheet and income statement laid before the company in general meeting. What must the auditor consider in order to meet this duty?

Question 28

A

Auditors must have certain rights to enable them to carry out their duties. Briefly discuss five rights of an auditor, excepting those dealing with resignation or removal.

Question 29

A

UK Companies Act, 2006 requires the directors to prepare a report with respect to the company's affairs. List six items that the Directors' report should set out.

Question 30

A

Explain five responsibilities of external auditors to directors and shareholders.

Question 31

A

Explain the role of the Professional Bodies in the regulation of auditors.



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Question 32

A

Explain the benefits of external audit.

A

Question 33 Describe five actions auditors can take when being threatened with removal by the directors.

Question 34

A

Explain the requirements of the ACCA's Rules of Professional Conduct relating to the supply of nonaudit services to public company audit clients.

Question 35

A

Explain why the provision of non-audit services to audit clients might be seen as a problem and why it is sometimes suggested that auditors should not provide such service.

Question 36 The onus is always on the auditor not only to be ethical but also to be seen to be ethical. To this end the ACCA (recognised as a 'Recognised Supervisory Body [RSB]') promulgates its 'Rules of Professional Conduct', part of which is the 'Fundamental Principles'. The 'Fundamental Principles' acts as a code which contains five major points. What are they?

Question 37 The IFAC also has its 'Fundamental Auditing Principles' which requires professional accountants to observe a number of prerequisites or fundamental principles. These are similar to those of the ACCA. What are the five principles in the IFAC's code.

Question 38

(d)

A

A

Briefly describe why the objectivity of the external auditor may be threatened or appear to be threatened in the following circumstances: (a) (b) (c)

A

There is undue dependence on any audit client or group of clients. The firm, its partners or staff have a financial interest in an audit client. There are family or other close personal or business relationships between the firm, its partners or staff and the audit client. The firm provides other services to audit clients.

Question 39

A

Describe ACCA's requirements that reduce the threats to auditor objectivity for each of the four circumstances detailed in Question 9.



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Question 40

A

An ACCA regulation states that 'A member's objectivity may be threatened or appear to be threatened as a consequence of a family or other close personal or business regulation ....' List six types of people who would be regarded as closely connected with an auditor.

Question 41

A

An ACCA regulation states that 'A member's objectivity must be beyond question if (s)he is to report as an auditor. That objectivity can only be assured if the member is, and is seen to be, independent'. Threats to an auditor's independence and objectivity could arise for a number of reasons. List five reasons.

Question 42 It is argued that the long-term nature of the company audit engagement tends to create a loss of audit independence, due to an increasing familiarity with the company's management and staff, which works against the shareholders and the public's interest. For this reason it is argued that there should be a rotation of the audit appointment every few years. Explain four reasons against such rotation.

Question 43

A

A

An ACCA regulation states, 'Auditor's have a professional duty of confidentiality. However they may be compelled .... to consider it desirable in the public interest to disclose details of client's affairs to third parties.' In general information acquired in the course of professional work should not be disclosed, but there are exceptions to this rule. Explain six recognised exceptions.

A

Question 44 What is meant by 'Due skill and care'?

Question 45

A

Audit firms, even small ones, often offer a wide range of business and accountancy services, and its services could include a portfolio of services to a client. List eight services (which are not auditing services) which could be in such a portfolio.

Question 46

A

In the UK, the Public Interest Disclosure Act 1988 gives protection to 'workers' who make qualifying disclosures (they whistleblow). Under the Act there are qualifying disclosures, in other words the disclosure of information that, under the Act, is permissible, and for which the worker is protected by making the disclosure. List six circumstances in which a worker can make a qualifying disclosure (whistleblow) and seek protection of the courts should it be necessary.



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Question 47

A

Briefly explain who is eligible to act as the auditor of a limited company under the provisions of the UK Companies Act, 2006.

Question 48 QuickParts Company, a car components manufacturer, made an initial public offer (IPO) and was listed on the London Stock Exchange and was therefore, for the first time, obliged to have a statutory audit. The directors are unsure as to their responsibilities and the nature of their relationship with the external auditors. The audit partner has asked you as audit manager to visit the client and explain to the directors the more fundamental aspects of the accountability of the company and their relationship with the auditor. UK legislation (Companies Act, 2006) is used to exemplify legislation used in most jurisdictions. Required: Prior to your meeting the audit partner asks you to write a letter to the directors of QuickParts Company explaining the following points in your letter, which will be discussed at the meeting: (a)

Why an audit is required.

A

(b)

How the auditor of a public company may be appointed under the UK Companies Act, 2006.

A

(c)

What the auditor's rights are under the UK Companies Act, 2006.

A

(d)

he responsibilities of the directors in relation to the accounting function of the company.

A

Question 49 The accountancy profession is constantly concerned by the problem of auditors' liability. (a)

You are required: (i) (ii)

(b)

A

to state to which parties the auditor might be liable; to state under what circumstances the auditor might be liable to third parties.

A

Your firm has been the auditor of Artak Artworks for many years. It has recently been discovered that for the past few years the managing director has consistently overvalued inventory. You are required to prepare a note for your audit partner advising him of the possible defences should a liability claim arise.

Question 50 It has been suggested that the liability of auditors should be limited because of: -

the increasing number and size of damages claims being brought against auditors; and the difficulty in obtaining adequate professional indemnity insurance cover, and its cost.

You are required: (a)

to list and briefly describe the circumstances when an auditor may be liable for damages for material mis-statements in published accounts on which he has expressed an audit opinion, and the circumstances when he may avoid liability.

A

The question continues on the next screen ©Tony Surridge Online Limited, 2013


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(b)

to list the persons who may make successful legal claim against an auditor, and state the basis a court of law would use to assess the value of damages.

A

(c)

to briefly describe the ways the liability of auditors could be limited, and consider the practicality of these methods of limiting an auditor's liability.

A

(d)

to consider what the effect of limiting an auditor's liability is likely to have on:

A

(e)

(f)

(i)

the investor's view of the reliability of the audit opinion; and

(ii)

the amount of work an auditor will perform (compared with the work he would perform if his liability was unlimited), and the effect this will have on the reliability of the audit opinion.

A

to briefly come to a conclusion on: (i)

whether you consider it is practicable for an auditor's liability to be limited;

(ii)

whether limiting an auditor's liability will affect the reliability of the audit opinion; and

(iii)

whether you would agree with the proposal that an auditor's liability should be limited.

Briefly discuss factors which the external auditor should consider in evaluating the work of the internal audit department

A

Question 51 You are a partner of a small certified accounting firm and also a member of a local sports centre. The club Chairman, who is a friend of yours, has persuaded you to become the centre's auditor and accountant. Required: (a)

Compare your responsibilities as accountant compared to those of auditor.

(b)

To what extent do you think your independence might be lessened because of: (i) (ii)

A A

your friendship with the club Chairman your own club membership?

Question 52

A

Discuss the extent to which, in practice, the UK legal requirements relating to the appointment of limited company auditors ensure auditor independence.

High expectations are the key to everything. Sam Walton Samuel Moore "Sam" Walton (1918 – 1992) was a businessman, entrepreneur, and Eagle Scout born in Kingfisher, Oklahoma best known for founding the retailers Wal-Mart and Sam's Club.



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Question 53 You have just started working for a small firm of accountants and the first audit which you will be assisting on is the company where your sister works as a Financial Director. Whilst in the planning meeting the audit manager is discussing independence and you are unsure as to exactly whether or not this relationship prevents you from performing any audit work. When discussing this with the manager he suggests you do some reading on the subject to aid your understanding and continue the discussion the next day. He also provides you with details of personal circumstances of other audit staff and asks you to consider what the outcome should be (see extract below). Extract (i)

One of the audit partners is a personal friend of the chief accountant of Manny Company. The chief accountant is not a director of the company and the audit partners is not responsible for Manny Company's work.

(ii)

The audit fee receivable from Zoomic Company is $150,000; the total fee income of the audit firm is $700,000.

(iii)

The audit senior in charge of the audit of Sterling Bank has a personal loan from the bank of $15,000 on which he is paying the market interest rate.

(iv)

One of the partners is responsible for two audits, Axol Company and Pamoy Company. Axol Company has recently tendered for a contract with Pamoy Company for a supply of material quantities of goods over a number of years. Pamoy Company has asked the audit partner to advise on the matter.

Required: (a)

Prepare a memorandum addressed to the audit manager explaining what is meant by the independence and suggest ways in which the auditor can try and ensure his independence is maintained.

A

Conclude on whether you think your relationship prevents you from assisting on the audit. (b)

A

State what you think the outcome should be in each of the four situations in the extract provided to you by the audit manager.

Question 54 (a)

Provided an auditor possesses professional objectivity, he does not have to be seen to be independent.

A

Required: Comment on the above statement ensuring that you include an explanation of the term 'professional objectivity' and include commentary on the validity of the statement. (b)

ACCA's Rules of Professional Conduct describe various situations and relationships, which if existing, could pose a threat to auditor independence. The guidance notes provide examples of appropriate actions that can be taken to safeguard against the loss of independence where such situations and relationships exist. Consider the following scenarios:

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A

(i)

On the 3 October 2012, the audit engagement partner of White & White Chartered Certified Co visited the offices of Campbo Company to plan the final audit procedures for the year ending 31 December 2012. A week later, each of the five partners of White & White Co received an unsolicited letter from the Managing Director of Campbo Company offering one year's free membership at one of its golf and country clubs with effect from 1 November 2012. Individual annual membership normally costs $3,000 and the offer was not made to anyone else.

(ii)

The wife of one of the audit managers at McDonalds Chartered Certified Accountants and A Company - a large audit firm and auditors of Dampont Company - has recently been appointed as the Financial Director of Dampont Company. Immediately prior to her appointment she had been employed by one of Dampont's competitors. Each of the directors of Dampont Company is entitled to an annual bonus based on the reported profit of the company.

(iii)

Gambles, Gambles & Gambles, a long established firm, audit the financial statements of two private limited companies owned by Albert Goldsmithe, an entrepreneur with a very dominant personality. The annual total fee income of Gambles, Gambles & Gambles is $2.4m and the combined audit fees attributable to the two companies is $220,000. Albert Goldsmithe has recently approached Gambles, Gambles & Gambles with a view to appointing them as auditors to a third limited company under his control. The projected annual fee attributable to the third company is $240,000.

A

Required: For each of the above scenarios: comment on any concerns you may have regarding the threat to auditor independence and objectivity and recommend the appropriate action to be taken by the audit firm to safeguard against any threat identified.

Question 55 You are the audit senior in a firm who has recently completed the audit of Metal Craft Company., and after extensive discussions with the directors of the company, the audit report has been qualified in respect of the auditors' inability to agree with the directors on the appropriateness of a provision against obsolete inventory. The directors have informed you that they intend to dismiss your firm as auditors, and replace you with a small local firm of accountants. The directors have informed you verbally that the reason for your dismissal is the disagreement over the provision for stock obsolescence, and further they intend to appoint the new auditors because they are more likely to accept the accounting policies of the directors. Your firm has recently received a letter from the nominee auditors asking if there are any professional reasons why they should not accept appointment as auditors of Metal Craft Company. Required: (a)

Prepare a working paper for the audit partners to be used in a meeting to discuss the current situation with Metal Craft Company. The working paper should outline the rights which the UK Companies Act, 2006 gives the auditor when a company proposes to dismiss him and has dismissed him.

A

(b)

Draft a suitable letter in reply to the request from the nominee firm of auditors asking if there are any reasons why they should not accept appointment as auditors.

A

(c)

One of the junior auditors who has just commenced employment with the firm is very interested in the situation and would like to discuss it with you further; he asks you to explain what the ethical implications for the nominee auditor are if he decides to accept appointment as auditor.

A

Draft a suitable response (in memorandum form) to the junior auditor.



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Question 56 You have just qualified with a BA degree in Accounting and Finance and have decided to study for a further professional accountancy qualification which your firm has offered to sponsor you for. They have also decided to employ two junior members of staff to study for their ACCA qualification and have asked you to spend some time with them explaining exactly what is required of them as accountants by law and by the ACCA. Required: (a)

A

Prepare a memorandum addressed to the partners of the firm outlining the provisions of the UK Companies Act, 2006 which strengthens the independence of the auditor. This will then be reviewed by the partners prior to being given to the junior members of staff.

(b)

Explain to the junior auditors the requirements of the ACCA's Professional Conduct Rule on Integrity, objectivity and independence which strengthen the independence of the auditor.

A

UK legislation (Companies Act, 2006) is used to exemplify legislation used in most jurisdictions.

Winners never quit and quitters never win. Vince Lombardi Vincent Thomas "Vince" Lombardi (June 1913 – 1970) was an American football coach. He is best known as the head coach of the Green Bay Packers during the 1960s, where he led the team to three straight league championships and five in seven years, including winning the first two Super Bowls following the 1966 and 1967 NFL seasons. Vince Lombardi



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Answer to Question 1 1. 2. 3. 4. 5. 6.

No No Yes Yes Yes Yes

-

Q

Independence is not required Independence is not required Independence is required Independence is required Independence is required Independence is required

Answer to Question 2 To From Subject

: : :

Client Accountant, ACCA The audit function as it relates to the assurance provided, the extent of evidence gathering, and whether independence is required.

Q

An audit is an examination of the financial statements. It is intended to provide positive assurance about the true and fair view of the statements. Thus, an audit provides the highest form of assurance. The audit report states whether the financial statements are fairly presented, in all material respects, in conformity with International Accounting Standards. An audit is conducted in accordance with the International Auditing Standards. The audit should be planned and performed to obtain sufficient competent evidence. The evidence should provide reasonable assurance about whether the financial statements are free of material misstatement. Hence, an audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used, significant management estimates, and the overall statement presentation. Finally, in all matters related to the assignment, the auditor(s) must maintain an independence in mental attitude. Signature ............


Q

The objective of an audit of financial statements is to enable the auditor to give an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework. The phrases used to express the auditors' opinion are: 'give a true and fair view' or 'present fairly in all material respects', which are equivalent terms.


Q

The following require a statutory audit (in the UK): Large limited liability companies, some charities, building societies, housing associations and trade unions.

There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else. Sam Walton



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Q

The key stages of the audit process are: 1. 2. 3. 4. 5. 6. 7.

Determine audit approach Ascertain the system and controls Assess the system and internal controls Test the system and internal controls Test the financial statements Review the financial statements Express an opinion


Q

Advantages of an audit for the partnership include: 1.

2. 3. 4. 5.

Means of settling accounts between partners. A partnership which has a complicated profit-sharing arrangement may require an independent examination of the accounts/financial statements to ensure as far as possible an accurate assessment and division of profits between the partners. Deciding entry terms for a new partner. May make the accounts more acceptable to the Inland Revenue. May facilitate the negotiation of a loan. May benefit a 'sleeping partner' who otherwise has little knowledge of partnership affairs.


Q

The IFAC glossary defines ‘Financial Statements’ as ‘A structured representation of historical financial information, including related notes, intended to communicate an entity’s economic resources or obligations at a point in time or the changes therein for a period of time in accordance with a financial reporting framework. The related notes ordinarily comprise a summary of significant accounting policies and other explanatory information. The term “financial statements” ordinarily refers to a complete set of financial statements as determined by the requirements of the applicable financial reporting framework, but it can also refer to a single financial statement’. IAS 1, [International Accounting Standards Board] includes four basic financial statements, accompanied by a management discussion and analysis: (i)

Statement of Financial Position: also referred to as a balance sheet, reports on a company's assets, liabilities, and ownership equity at a given point in time.

(ii)

Statement of Comprehensive Income: also referred to as Profit and Loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time. A Profit & Loss statement provides information on the operation of the enterprise. These include sale and the various expenses incurred during the processing state.

(iii)

Statement of Changes in Equity: explains the changes of the company's equity throughout the reporting period .

(iv)

Statement of cash flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities.



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Q

1.

Disclosure. Is a release by the entity of information, positive or negative, that might bear on an entity's existing position or performance. For example, the annual Financial Statements issued by a company constitute disclosures.

2.

Negative assurance. Is when an auditor gives an assurance that nothing has come to his (her) attention which indicates that the financial statements have not been prepared according to the relevant framework. In other words s(he) gives an assurance in the absence of any evidence to the contrary.

3.

Internal audit. Internal audit is an independent, objective assurance and consulting activity designed to add value and improve an entity's operations. It helps an entity accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.

4

Audit assurance. Is the auditor's satisfaction as to the reliability of the assertion made by one party for use by another party.

Q

Answer to Question 9 1.

TRUE

2.

FALSE

What is included in the audited financial statements, and what is excluded, is determined largely by national legislation and accounting standards.

3.

FALSE

Users of the compiled information gain some benefit from the accountant's (as opposed to the auditor's) involvement, but no assurance is given.

4.

FALSE

Reviews do not give the same high level of assurance as an audit.

5.

FALSE

Auditors do not certify the financial statements or guarantee that the financial statements are correct; they report whether in their opinion they give a 'true and fair view' or 'present fairly' the financial position.

6.

TRUE

Only in specific public sector organisations is the internal audit a statutory requirement.

7.

FALSE

Principal-agency theory (PAT) predicts that, by behaving rationally, management (the agents) are motivated to act against the interests of the shareholders (principals).

8.

FALSE

The audit report may be out-of-date by the time its published.

9.

FALSE

Controls can be overridden, evidence of the existence of controls is not enough.

10.

TRUE

A good time will be had by all!!!



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Exam Status Questions and Answers (Note: Questions and Answers are also hyper-linked to each other.)

Syllabus Section A: Audit Framework and Regulation Title

Screen

Question Letters to a School Friend Answer

A question covering issues concerning ASAs

903

Letters to a School Friend

904

Question JD Development Company Answer Question

Answer Question Answer Question Answer Question Answer

A question covering underpayment, under provisions and the removal of the auditor JD Development Company StrictBus Company A question covering issues concerning inventory, fundamental principles set out in ACCA’s Code of Ethics and Conduct of integrity, objectivity and independence and the engagement letter StrictBus Company Put-U-Up Construction Company A question covering various corporate governance issues Put-U-Up Construction Company Objectivity of the external auditor A question covering the objectivity of the auditor Objectivity of the external auditor Holway Hotel and Xfoods Company A question covering conflict of interests, provisions, contingent liabilities and contingent assets

906

Holway Hotel and Xfoods Company

921

Question ACS Company A question covering corporate governance issues Answer ACS Company Question Arwan & Co A question covering issues related to corporate governance Answer Arwan & Co Question Newingreen Consolidated Company A question covering the principles of confidentiality, and audit independence Answer Newingreen Consolidated Company Question Rainbow Company A question covering weaknesses in a system and advantages of having an audit committee Answer Rainbow Company

907 909 910 912 913 916 917 920

924 925 927 928 930 931 933 934

Note:




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Letter to a School Friend: Question - 1 of 1 A question covering issues concerning ISAs International Standards on Auditing (ISAs) are produced by the International Audit and Assurance Standards Board (IAASB), which is a technical committee of the International Federation of Accountants (IFAC). In recent years, there has been a trend for more countries to implement the ISAs rather than produce their own auditing standards. A school friend who you have not seen for a number of years is considering joining ACCA as a trainee accountant. However, she is concerned about the extent of regulations which auditors have to follow and does not understand why ISAs have to be used in your country. Required: Write a letter to your friend explaining the regulatory framework which applies to auditors. Your letter should cover the following points: (a)

The due process of the IAASB involved in producing an ISA.

(4 marks)

A

(b)

The overall authority of ISAs and how they are applied in individual countries.

(8 marks)

A

(c)

The extent to which an auditor must follow ISAs.

(4 marks)

A

(d)

The extent to which ISAs apply to small entities.

(4 marks) (20 marks)

A

Business opportunities are like buses, there's always another one coming. Sir Richard Branson



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Letter to a School Friend: Answer - 1 of 2

Q

A question covering issues concerning ISAs 22b Cherry Garden Lane Anytown 3 March 2013 Dear Peppi I am pleased you are also thinking about accountancy as a career and understand your concern regarding the use of Auditing Standards. I will try and explain the need for standards in this letter. The working procedure of the IAASB to produce an ISA The start of the process of producing an International Standard on Auditing (ISA) is for a subcommittee of the International Audit and Assurance Standard Board (IAASB) to determine appropriate areas for an ISA, or to note where existing ISAs need amendment. The subcommittee produces an exposure draft on that subject, initially for consideration by the IAASB. If the IAASB approve the exposure draft, then it is circulated to the member bodies of the International Federation of Accountants (IFAC) and any other organisations that have an interest in auditing standards and published on the IAASB website. These bodies make comments on the exposure draft. Comments are sent back to the IAASB and the exposure draft is amended as necessary. Finally the exposure draft is re-issued as an ISA or an International Auditing Practice Statement (IAPS). The whole process can take between one and two years. The overall authority of ISAs and how ISAs are applied in individual countries ISAs are designed to be applied in the audit of financial statements and may be applied to the audit of other historical financial information. Each ISA contains the basic principles and procedures to apply to that ISA (identified by bold type in the ISA itself). Other text in the ISA provides guidance on the implementation of the principles. In other words, to apply the ISA, the whole of the text, not simply the parts in bold type, must be read and understood. ISAs are not designed to override the requirements for the audit of entities in individual countries. So if our country did not require an audit of specific entities, then the ISAs would not overrule that requirement. Regarding the detailed requirements of an audit, such as the nature of testing or the issuing of an engagement letter, where our country requirements meet those of the ISA, then the ISA will be used. It is therefore unlikely that our country would issue a separate auditing standard; the ISA would be sufficient. Where our local codes on audit differ from the ISA, then the local requirements are used. However, we are encouraged to introduce changes in our country so that the requirements of the ISA are met. For example, our country may require an engagement letter to be signed every five years, but the ISA requires one every year. In this case, local change is needed to comply with the ISA. The extent to which an auditor must follow ISAs An auditor should follow the ISAs wherever possible. However, in some situations an auditor may consider it necessary to depart from the ISA so that the objectives of the audit can be achieved more efficiently. In this situation, the auditor can depart from the ISA, but he or she must be prepared to justify the departure. It is expected that departure from any ISA will be the exception rather than the rule.

Q

The answer continues on the next screen ©Tony Surridge Online Limited, 2013


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Letter to a School Friend: Answer - 2 of 2

Q

A question covering issues concerning ISAs The extent to which ISAs apply to small entities To be clear, ISAs are meant to be applicable to the audit of any entity, no matter what its size. However, in small entities, the auditor may have to amend the audit approach to fit the circumstances of that business. For example, there will be greater reliance on substantive testing and management representations. However, the appropriate ISAs should be followed. Conclusion I hope that this clarifies your understanding of ISAs. Please let me know if I can be of further assistance to you in your accountancy career. Yours sincerely,

Q

Toni Ambel

Customers want good value, but they care more than ever how food and clothing products are made. Sir Stuart Rose

Marks & Spencer at Robinsons Mall, Manila, Philippines


Sir Stuart Alan Ransom Rose (born 1949) is a British businessman, who was the executive chairman of the British retailer Marks & Spencer.


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JD Developments Company: Question - 1 of 1 A question covering underpayment, under-provisions and the removal of the auditor

You are the auditor of JD Developments, a limited liability company. The main activity of the company is the construction of buildings ranging in size from individual houses to large offices and blocks of flats. Under the laws of the country JD Developments operates in, JD Developments must add sales tax to all buildings sold and they pay this tax to the government at the end of each month. The largest non-current asset on JD Development’s balance sheet is the plant and machinery used in the construction of buildings. Due to the variety of different assets used, four different sub-classes of plant and machinery are recognised, each with its own rate of depreciation. You are now reaching the end of the audit work for the year ended 30 June 2013. There are two specific matters where additional audit work is required: (i)

The sales tax for the month of May was not paid to the government. This appears to have been an accidental error and the amount involved is not material to the financial statements.

(ii)

The complicated method of calculating depreciation for plant and machinery appears to have resulted in depreciation being calculated incorrectly, with the result that depreciation may have been under-provided in the financial statements.

Required: (a)

Explain the additional audit procedures you should take regarding the accidental underpayment of sales tax. (7 marks)

A

(b)

Explain the additional audit procedures you should take regarding the possible under-provision of depreciation. (7 marks)

A

(c)

You have determined that the under-provision is material to the financial statements and therefore need to modify the audit report. The directors have informed you that they do not intend to take any action regarding the under-provision of depreciation. They also disagree with your action and have threatened to remove your company as the auditors of JD Developments unless you agree not to modify your report. Required: Explain the procedures that the directors must follow in order to remove your company as the auditors of JD Developments. (6 marks) (20 marks)

A

I could have closed down bits of British Home Stores to make more money but it's not my style. I want to make my money as a retailer, not by putting people out of work. Philip Green Sir Philip Green (born 1952) is a British businessman. Green was born into a Jewish family in 1952, beginning as a businessman at the age of 15. The first and last quoted company Green took lead of was "Amber Day", from which he stepped down as CEO and Chairman in 1992. Since then he has had links to a range of British companies; including a hostile bid for Marks and Spencer and the management of the Arcadia Group, both alongside or supporting his wife.



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JD Developments Company: Answer - 1 of 2

Q

A question covering underpayment, under-provisions and the removal of the auditor (a)

(b)

Audit procedures for underpayment of revenue tax –

Discuss the underpayment with the head of the accounting department to ascertain whether the error was known, and if so why no action had been taken to correct the error.

–

Evaluate the results of testing to determine the amount of the underpayment. Where necessary perform additional substantive tests checking from the tax declared on sales invoices issued during August to the sales tax calculation.

–

Summarise the results of testing, providing an estimate of the amount of sales tax underpaid.

–

Discuss the situation with the directors to obtain an understanding of how the error occurred and determine what actions the directors will take.

–

Include the weakness in the management letter noting, if possible, the reason for the error and the action that must be taken to correct the error.

–

Inform the directors that non-payment of sales tax to the government is a breach of specific law of their country.

–

Ask for a formal response from the directors, clearly indicating what action they propose to take regarding the underpayment.

–

Where the amount due has been paid to the government, audit the payment and ensure it is sufficient given the extent of underpayment already detected.

–

Where the amount due is not paid, consider informing the appropriate authorities where legislation requires this.

–

Consider and ask the directors to provide for any late penalties that will need to be paid to the government with regards to the late payment.

Audit procedures for under-provision of depreciation –

Review the results of the audit working papers to check that an error did occur.

–

Extend substantive testing for this particular class of non-current assets to try and determine the extent of the error.

–

Calculate the new depreciation provision based on the results of your testing.

–

Compare your estimate of depreciation to the amount calculated by the client to determine whether the difference is material.

–

Discuss the under-provision with the head of the accounting department to ascertain whether the error was known, and if so why no action had been taken to correct the error.

–

Discuss the situation with the directors to ascertain what action the directors will take. If the difference is material then an amendment to the financial statements would be expected. Q



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JD Developments Company: Answer - 2 of 2

Q

A question covering underpayment, under-provisions and the removal of the auditor

(c)

–

Include the weakness in the management letter noting, if possible, the reason for the error and the action that must be taken to correct the error.

–

If the difference is material and the directors do not amend the financial statements, consider the need to modify the auditor’s report.

To remove the auditor from office before their term of office has expired, the directors of JD Developments must proceed as follows: –

Arrange for a meeting of the shareholders of the company.

–

Write to the shareholders providing notice of the meeting and the agenda. The notice must also be sent to the auditor.

–

Attend the meeting and organise a counting of votes at the meeting on the resolution to remove the auditor from office. In most situations, a simple majority of the shareholders is required to confirm the resolution.

–

Auditors are sometimes given the right to make written representations and to speak at the meeting.

–

If the auditor is removed, where necessary, obtain a statement of circumstances from the auditor. If there are no circumstances that need to be brought to the attention of the shareholders then a statement of no circumstances is required. Where required by specific country legislation, deposit this statement along with notice of removal of auditor, with the appropriate authorities.

–

Make arrangements to appoint another auditor as companies are normally required to have auditors.

Q

Every company has two organizational structures: The formal one is written on the charts; the other is the everyday relationship of the men and women in the organization. Harold S. Geneen Harold S. Geneen was born in 1910 in Bournemouth, Hampshire, England and migrated to the United States as an infant with his parents. He studied accounting at New York University. Between 1956–1959 he was Senior Vice President of Raytheon, developing his management structure, allowing large degree of freedom for divisions while maintaining a high degree of financial and other accountability. From 1959–1977 he was the president and CEO of International Telephone and Telegraph Corp. (ITT). He grew the company from a medium-sized business with $765 million sales in 1961 into multinational conglomerate with $17 billion sales in 1970. He extended its interests from manufacturing of telegraph equipment into insurance, hotels, real estate management and other areas. Under Geneen's management, ITT became the archetypal modern multinational conglomerate. ©Tony Surridge Online Limited, 2013


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StrictBus Company: Question - 1 of 1 A question covering issues concerning inventory, fundamental principles set out in ACCA’s Code of Ethics and Conduct of integrity, objectivity and independence and the engagement letter

You are an audit manager in Jacobson & Co. One of your audit clients, StrictBus Co, is a specialist supplier of business books with over 248,000 customers. The company owns one large warehouse, which contains at any one time about 1 million books of up to 220,000 different titles. Customers place orders for books either over the Internet or by mail order. Books are despatched on the day of receipt of the order. Returns are allowed up to 30 days from the despatch date provided the books look new and unread. Due to the high inventory turnover, StrictBus maintains a perpetual inventory system using standard ‘off the shelf’ software. Jacobson & Co has audited the system for the last five years and has found no errors within the software. Continuous inventory checking is carried out by StrictBus’s internal audit department. You are currently reviewing the continuous inventory checking system with an audit junior. The junior needs experience in auditing continuous inventory checking systems and some basic knowledge on ACCA’s Code of Ethics and Conduct. Required:

A

(a)

Explain the advantages of using a perpetual inventory system.

(4 marks)

(b)

List the audit procedures you should perform to confirm the accuracy of the continuous inventory checking at StrictBus Co. For each procedure, explain the reason for carrying out that procedure. (6 marks)

A

(c)

Explain the fundamental principles set out in ACCA’s Code of Ethics and Conduct of integrity, objectivity and independence to accountants. (6 marks)

A

(d)

During your preliminary audit planning you note that the engagement letter has been returned unsigned by the directors of StrictBus. When asked to explain their action, the directors indicate that they cannot allow you access to information on the company’s new website development as this contains various trade secrets. You will not, therefore, be able to perform audit procedures on the research and development expenditure incurred on the website and included in non-current assets. Briefly explain the actions you should take as a result of the directors not signing the engagement letter. (4 marks) 20 marks)

A

I think it is an immutable law in business that words are words, explanations are explanations, promises are promises - but only performance is reality. Harold S. Geneen



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StrictBus Company: Answer - 1 of 2

Q

A question covering issues concerning inventory, fundamental principles set out in ACCA’s Code of Ethics and Conduct of integrity, objectivity and independence and the engagement letter (a)

(b)

Advantages of perpetual inventory systems –

There is no disruption caused by an annual inventory count.

–

There is more accurate and regular inventory counting, which enables errors and slow moving or damaged inventory to be identified earlier.

–

Actual inventory balances are known at any time, allowing re-ordering of best selling books to take place on a timely basis. There will also be fewer causes of inventory reaching zero causing stockouts with orders not being fulfilled.

–

Increased control over storekeepers because inventory is being reviewed regularly; this should decrease any pilferage.

–

Auditors can rely on the computerised inventory system, reducing substantive audit tests of inventory during the year and at the year end.

Audit procedures Audit procedure - Physical count

Reason for procedure

Arrange a meeting with the internal audit department. Discuss the procedures carried out and review working papers produced during the continuous inventory checks. For any errors identified, ensure that appropriate adjustments were made to the perpetual inventory system.

Determine the extent to which reliance can be placed on the work of the internal audit department.

Visit the warehouse and: Obtain a sample of inventory items already recorded on the perpetual inventory system and agree to the book inventory.

To ensure that the inventory recorded on the computer system actually exists.

For a sample of books in the warehouse, obtain details and agree perpetual computer system records.

To ensure that all inventory is recorded on the inventory computer system – and there is completeness of recording.

Review the condition of the books, taking details of any which appear to be old or damaged.

To confirm that any inventory which is damaged or unsaleable is correctly valued.

Form an opinion regarding the overall accuracy of the perpetual inventory system.

To confirm that inventory quantities have been correctly recorded.

Ensure all inventory lines are counted at least once per year in discussion with the internal audit department.

To confirm that all inventory is counted regularly.

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StrictBus Company: Answer - 2 of 2

Q

A question covering issues concerning inventory, fundamental principles set out in ACCA’s Code of Ethics and Conduct of integrity, objectivity and independence and the engagement letter

(c)

Fundamental ethical principles Integrity Integrity is essential for all people operating in the public interest. Integrity implies not only honesty, but also related qualities of fairness, candour, intellectual honesty and confidentiality. During an audit it is essential that directors can rely on an auditor to keep information about the company confidential. If this was not the case then directors may be less forthcoming with essential information, decreasing the effectiveness of the audit. Objectivity Objectivity is a state of mind that excludes bias, prejudice and compromise and that gives fair and impartial consideration to all matters that are relevant to the task in hand, disregarding those that are not. Accountants have to be objective because many of the factors which make up an opinion on a set of financial statements relate to questions of judgement rather than fact. Accountants therefore need to be unbiased and impartial in making their decisions, especially where they may need to challenge assumptions already made by the directors. Independence Independence is freedom from situations and relationships which make it probable that a reasonable and informed third party would conclude that objectivity is either impaired or could be impaired. Independence is therefore related to and underpins objectivity. Accountants will therefore not participate in any activity or relationship that may impair, or appear to impair, their judgement. They will also not accept anything which may appear to impair their judgement.

(d)

Actions in respect of the engagement letter not being signed –

Discuss the matter again with the directors in an attempt to reach a suitable compromise.

–

Remind the directors that statutory audits require the directors to make all the necessary information and explanations available to the auditor.

–

Explain that lack of information on the website will result in a limitation in scope of the audit work.

–

Further explain that because the lack of evidence appears to relate to a material amount that the auditor’s report will have to be modified with an ‘except for’ qualification due to the lack of information and the possibility of misstatement of non-current assets.

–

Finally note that auditor may have to decline to work for StrictBus unless suitable terms of engagement can be agreed.

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Put-U-Up Construction Company: Question - 1 of 1 A question covering various corporate governance issues

Put-U-Up are an independent construction company, dealing with large scale contracts throughout the UK and with some international interest in Europe, particularly in Spain. Put-U-Up have recently established an Audit Committee, the members of which are very concerned about meeting corporate governance ‘best practice’, particularly since they are currently looking at the possibility of obtaining a stock exchange listing. You are an internal auditor with the company and have been asked to conduct a review of how well the company is meeting relevant corporate governance requirements. You are required to prepare a report that addresses the following. (a)

What is meant by ‘corporate governance’ and why is it important that companies should comply with relevant corporate governance requirements? (4 marks)

A

(b)

What are the key issues for Put-U-Up to address to achieve effective corporate governance? (5 marks)

A

(c)

What is the role of internal audit in achieving corporate governance compliance?

(4 marks)

A

(d)

What should the role of the Audit Committee in relation to corporate governance be? (4 marks)

A

(e)

List the types of regular reporting that would be useful for Put-U-Up in the context of establishing sound corporate governance. (3 marks) (20 marks)

A

Sir John Edward Cohen (6 October 1898 – 24 March 1979), born Jacob Edward Kohen and commonly known as Jack Cohen, was a British businessman who founded the Tesco supermarket chain. He was born in Chatham in the Medway area of Kent, the son of an Avram Kohen, an immigrant Polish-Jewish tailor, and his first wife, Sime Zamremb. He began his working life as an apprentice tailor to his father but in 1917 he joined the Royal Flying Corps where he served as a canvas maker. Upon his demobilisation in 1919 he established himself as a market stall holder in Hackney, in London's East End by purchasing surplus NAAFI stock with his demob money. He soon became the owner of a number of market stalls, and started a wholesale business. Initially the other stalls were run by members of the family but gradually non-family members were added. Cohen and his wife worked 7 days a week, starting at dawn and counting money until late. At each market the traders would gather and, at a signal they would race to their favoured pitch. Cohen could not run fast so he simply threw his cap at the spot and this could beat anyone.



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Put-U-Up Construction Company: Answer - 1 of 3

Q

A question covering various corporate governance issues

Tutorial comment This question is ideally answered using bullet points rather than long paragraphs (with the exception of part (a)). Remember that you are always more likely to achieve high marks by providing a number of relevant points in your answer rather than just one or two. Use the number of marks as a guide to the number of points needed for each part of the answer. Good exam technique requires you to make use of specific information provided in the question. Here, it is very important to note that Put-U-Up is considering a stock exchange quotation – corporate governance issues are important if the company’s shares are listed. Report to the Audit Committee (a)

Corporate Governance Corporate Governance concerns the way that a company is operated and directed. It encompasses the following key aspects: The role of the Board and Audit Committee. Overall control and risk management framework. Corporate Governance has become increasingly important to all organisations, particularly those with a stock exchange listing. For example, in the UK such companies are subject to the requirements of the Combined Code and the Turnbull report. Management and control is often more difficult to achieve in larger, more complex organisations. In addition, shareholders (the owners) tend to be more remote from the directors who manage the company on their behalf. The Turnbull Report for example requires that companies have an ongoing process for identifying, evaluating and managing the company’s key risks. This process should comply with the Turnbull guidelines, and should be regularly reviewed by the Board. Failure by a company to comply with relevant corporate governance requirements could result in a qualification in the audit report and could damage the company’s image and reputation.

(b)

Requirements of Corporate Governance Put-U-Up need to ensure that the following key requirements are met: Evaluate risks within the organisation. The key risks throughout the organisation need to be identified, measured and reported. Consider the nature and extent of the risks regarded as acceptable. There needs to be a clear understanding of the risk attitude of Put-U-Up. Assess the chances of such risks materialising and their likely impact. Evaluate the ability of the company to reduce incidence and impact if risk arise. This will include a review of the contingency arrangements which are in place.

Q



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Q


Costs and benefits relating to operating relevant controls will need to be considered. The Board and Audit Committee need to establish a culture in the company which is responsive to the requirements of sound corporate governance. Regular reporting should be in place to demonstrate that risks are being managed on an ongoing basis. (c)

Role of Internal Audit Turnbull says that an independent and adequately resourced internal audit function should be in a positive to provide the Board with much of the assurance it requires regarding the effectiveness of the system of internal control. Internal Audit’s main role is normally to evaluate risk and monitor the effectiveness of the system of internal control. The precise role of internal audit will depend on the nature and type of organisation and what other risk type functions are in existence within the company. Key internal audit procedures will be to: review the company’s measures to achieve corporate governance ensure that Internal Audit Department’s operation is consistent with the major risks facing the organisation produce analysis of and opinions on the effectiveness of the organisation’s control mechanisms, which should be communicated regularly to the Board and Audit Committee.

(d)

Role of the Audit Committee The role and importance of the Audit Committee has increased as the corporate governance requirements have been strengthened. The audit committee must have at least three nonexecutive directors who should be independent of the company in that they have no direct involvement in the day to day running of its affairs. The Audit Committee should: assess the framework for complying with corporate governance guidelines within the company, including the risk assessment procedures review the major risks identified including their chances of occurring and their likely impact require regular reporting from internal and external auditors and any other review bodies, showing how the risks are being managed

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Q


receive and review internal audit assignment reports and follow up information discuss and consider any concerns of directors and internal audit staff review annual financial statements and the results of the external auditors’ exam to ensure that the auditors have performed an effective, efficient and independent audit receive and deal with external auditors’ criticisms of management and ensure that recommendations of internal and external auditors have been implemented. (e)

Types of Regular Reporting Types of regular reporting that could be produced for the Audit Committee include: listing of current major risks and up-to-date assessment of impact and likelihood reports on control of risks including how they are being managed details of any issues/concerns that have arisen since the last report audit reports issued and impact on corporate governance information on follow up on outstanding risks and findings from reports.

Q

Audacity, more audacity, always audacity. Georges Jacques Danton Georges Jacques Danton (1759 – 1794) was a leading figure in the early stages of the French Revolution and the first President of the Committee of Public Safety. Danton's role in the onset of the Revolution has been disputed; many historians describe him as "the chief force in the overthrow of the monarchy and the establishment of the First French Republic".



Georges Jacques Danton

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PAST EXAM QUESTIONS AND ANSWERS

Click to the next screen



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DinZee Company: Question Audit procedures – on a purchase system. Procedures prior to an inventory count. Weaknesses detected in a control system for counting inventory and related discussion. DinZee Co assembles fridges, microwaves, washing machines and other similar domestic appliances from parts procured from a large number of suppliers. As part of the interim audit work two weeks prior to the company year-end, you are testing the procurement and purchases systems and attending the inventory count. Procurement and purchases system Parts inventory is monitored by the stores manager. When the quantity of a particular part falls below re-order level, an e-mail is sent to the procurement department detailing the part required and the quantity to order. A copy of the e-mail is filed on the store manager’s computer. Staff in the procurement department check the e-mail, allocate the order to an authorised supplier and send the order to that supplier using Electronic Data Interchange (EDI). A copy of the EDI order is filed in the order database by the computer system. The order is identified by a unique order number. When goods are received at DinZee, the stores clerk confirms that the inventory agrees to the delivery note and checks the order database to ensure that the inventory were in fact ordered by DinZee. (Delivery is refused where goods do not have a delivery note.) The order in the order database is updated to confirm receipt of goods, and the perpetual inventory system updated to show the receipt of inventory. The physical goods are added to the parts store and the paper delivery note is stamped with the order number and is filed in the goods inwards department. The supplier sends a purchase invoice to DinZee using EDI; invoices are automatically routed to the accounts department. On receipt of the invoice, the accounts clerk checks the order database, matches the invoice details with the database and updates the database to confirm receipt of invoice. The invoice is added to the purchases database, where the purchase day book (PDB) and suppliers individual account in the payables ledger are automatically updated. Required: (a) List SIX audit procedures that an auditor would normally carry out on the purchases system at DinZee Co, explaining the reason for each procedure. (12 marks) (b)

(c)

A

List FOUR audit procedures that an auditor will normally perform prior to attending the client’s premises on the day of the inventory count. (2 marks)

A

On the day of the inventory count, you attended depot nine at DinZee. You observed the following activities: 1.

Pre-numbered count sheets were being issued to client’s staff carrying out the count. The count sheets showed the inventory ledger balances for checking against physical inventory.

2.

All count staff were drawn from the inventory warehouse and were counting in teams of two.

3.

Three counting teams were allocated to each area of the stores to count, although the teams were allowed to decide which pair of staff counted which inventory within each area. Staff were warned that they had to remember which inventory had been counted.

4.

Information was recorded on the count sheets in pencil so amendments could be made easily as required.

5.

Any inventory not located on the pre-numbered inventory sheets was recorded on separate inventory sheets – which were numbered by staff as they were used.



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At the end of the count, all count sheets were collected and the numeric sequence of the sheets checked; the sheets were not signed.

Required:

(d)

(i)

List the weaknesses in the control system for counting inventory at depot nine. (3 marks)

(ii)

For each weakness, explain why it is a weakness and state how that weakness can be overcome. (9 marks)

(i)

State the aim of a test of control and the aim of a substantive procedure.

(ii)

In respect of your attendance at DinZee Co’s inventory count, state one test of control and one substantive procedure that you should perform. (4 marks) (30 marks)

A

A

The fool doth think he is wise, but the wise man knows himself to be a fool. William Shakespeare As You Like It

Facsimile of the first page of As You Like It from the First Folio, published in 1623. ©Tony Surridge Online Limited, 2013


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DinZee Company : Answer Plan

Q

A quickly drafted answer plan will help you plan and structure your answer. We provide plans for each answer to show how this might be done.

Answer (a) For full answer (a) click here Procedure E-mails to order database Order database to delivery note Orders to inventory database Paper goods receipt notes to inventory database Orders database to payables ledger database Computerised purchase invoice details to record of purchase invoice Details of purchase invoice database to EDI purchase invoice received Purchase invoice record to payables database CAATs – cast Purchase Day Book (PDB), trace to general ledger Walk through test Observing goods being received Other relevant procedures

Tutorial comment Only 6 procedures are required. 1 mark would be earned for stating the procedure and 1 mark for the reason for that procedure which must be fully explained. A columnar approach may save time and give a better visual relationship between procedure and reason. This is the approach adopted here. End of Tutorial comment

Q ©Tony Surridge Online Limited, 2013


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Answer (b)

Q

For full answer (b) click here Audit procedures prior to inventory count attendance Review prior year working papers for problems Contact client to obtain stock-take instructions Book audit staff to attend the inventory counts Obtain copy of inventory count instructions from client Ascertain whether any inventory is held by third parties Obtain last year’s inventory count memo Prepare audit programme for the count Obtain prior year management letter for evidence of stocktake problems Other relevant points

Tutorial comment 0.5 marks for each procedure. End of Tutorial comment

Answer (c) For full answer (c) click here Weaknesses in counting inventory Inventory sheets stating the quantity of items expected to be found in the store Count staff all drawn from the stores Count teams allowed to decide which areas to count Count sheets not signed by the staff carrying out the count Inventory not marked to indicate it has been counted Recording information on the count sheets in pencil Count sheets for inventory not on the pre-numbered count sheets where only numbered when used Other relevant points

Tutorial comment The Examiner awarded 1 mark for each weakness, up to 1.5 marks for explaining the reasons and up to 1·5 for stating how to overcome weakness. 4 max therefore per weakness.

Q

End of Tutorial comment ©Tony Surridge Online Limited, 2013


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Q Answer (d) For full answer (d) click here Test of control Test of control aim Substantive procedure aim Stating test of control relevant to inventory count Stating substantive procedure relevant to inventory count

Tutorial comment 1 marks for each. End of Tutorial comment

All that is gold does not glitter, Not all those who wander are lost; The old that is strong does not wither, Deep roots are not reached by the frost. J.R.R. Tolkien The Fellowship of the Ring John Ronald Reuel Tolkien, CBE (1892 – 1973) was an English writer, poet, philologist, and university professor, best known as the author of the classic high fantasy works The Hobbit, The Lord of the Rings, and The Silmarillion. He served as the Rawlinson and Bosworth Professor of Anglo-Saxon at Pembroke College, Oxford, from 1925 to 1945 and Merton Professor of English Language and Literature at Merton College, Oxford from 1945 to 1959. He was at one time a close friend of C. S. Lewis—they were both members of the informal literary discussion group known as the Inklings.

J.R.R Tolkien



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DinZee Company: Answer Audit procedures – on a purchase system. Procedures prior to an inventory count. Weaknesses detected in a control system for counting inventory and related discussion. (a)

Q

Audit procedures procurement and purchases system Procedure

Reason for procedure

Obtain a sample of e-mails from the store manager’s computer. Trace details to the order database.

Ensure that all orders are recorded and that the order details are correct.

Obtain a sample of orders in the order database, record details of the order and trace to the paper delivery note filed in the goods inwards department.

To confirm that all goods ordered were received.

For the sample of orders above, agree to the inventory database.

To confirm that goods received were completely and accurately recorded in the inventory database.

Obtain a sample of paper delivery notes and agree to the order database and inventory database.

To confirm that inventory received has been recorded in DinZee’s accounting system and that liabilities are therefore not understated.

For a sample of orders in the orders database, agree details to the payables ledger database, confirming details against the purchase invoice.

To confirm complete and accurate recording of the inventory liability in the payables database. Note: To ensure goods received have been recorded as a payables liability the sample selected from the order database should be only those orders that have been received. The invoice number in the order database is then noted and traced to the payables ledger in the purchase database.

Within the purchase database, obtain a sample of invoices recorded in the purchase day book, agree details of price and supplier to the purchase invoice record in the database.

To confirm that purchase invoice details have been correctly recorded in the payables database.

For a sample of purchase invoices in the purchase day book, agree details to the delivery notes for items on that invoice.

To confirm that the purchase liability has been recorded only for goods actually received.

For the sample of purchase invoices above, agree details to the individual payables account in the payables database.

To confirm that the liability has been recorded in the correct payables account.

For a sample of supplier invoices, cast and cross cast invoice price and quantities confirming price to the original order.

To confirm the arithmetical accuracy of invoices and ensure the company was charged the correct price for goods received.

Select increases in the purchase daybook and vouch to the order database.

To ensure that invoiced goods have been ordered, confirming the occurrence assertion.

Using computer-assisted audit techniques, cast the purchase day book and agree total of liability incurred to the general ledger.

To confirm the completeness and accuracy of the liability recorded in the general ledger.



Q

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Audit procedures prior to inventory count attendance

Q

Procedure – – – – – – –

Review prior year working papers Contact client to obtain stocktaking instructions Book audit staff to attend the inventory counts Obtain copy of inventory count instructions from client Ascertain whether any inventory is held by third parties Obtain last year’s inventory count memo Prepare audit programme for the count.

For an aide memoire chart concerning the procedure of attending an inventory count refer to the next screen. (c)

Weaknesses in counting inventory

Weakness

Reason for weakness

How to overcome weakness:

Inventory sheets stated the quantity of items expected to be found in the store

Count teams will focus on finding that number of items making undercounting of inventory more likely – teams stop counting when ‘correct’ number of items found.

Count sheets should not state the quantity of items so as not to pre-judge how many units will be found.

Count staff were all drawn from the stores

Count staff are also responsible for the inventory. There could be a temptation to hide errors or missing inventory that they have removed from the store illegally.

Count teams should include staff who are not responsible for inventory to provide independence in the count.

Count teams allowed to decide which areas to count

There is a danger that teams will either omit inventory from the count or even count inventory twice due to lack of precise instructions on where to count.

Each team should be given a precise area of the store to count.

Count sheets were not signed by the staff carrying out the count

Lack of signature makes it difficult to raise queries regarding items counted because the actual staff carrying out the count are not known.

All count sheets should be signed to confirm who actually carried out the count of individual items.

Inventory not marked to indicate it has been counted

As above, there is a danger that inventory will be either omitted or included twice in the count.

Inventory should be marked in some way to show that it has been counted to avoid this error.

Recording information on the count sheets in pencil

Recording in pencil means that the count sheets could be amended after the count has taken place, not just during the count. The inventory balances will then be incorrectly recorded.

Count sheets should be completed in ink.

Count sheets for inventory not on the pre-numbered count sheets were only numbered when used

It is possible that the additional inventory sheets could be lost as there is no overall control of the sheets actually being used. Sheets may not be numbered by the teams, again giving rise to the possibility of loss.

All inventory sheets, including those for ‘extra’ inventory, should be pre-numbered.



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Substantive audit tests: inventory count

1

Preliminary knowledge is required

2

The auditor needs to identify the key factors

3

4

The auditor needs to:  Review the previous year’s arrangements and success rating.  Discuss with management inventory control arrangements and significant changes during the current year. The key factors concerning the inventory count are:  The nature and volume of inventory.  Risks identified with the inventory.  The identification of high value items.  Method of accounting for inventory.  Location of inventory and how it affects inventory control and recording.  Internal control and accounting systems in use which will enable the auditor to identify potential areas of difficulty.

Planning precedes performance!

The auditor should:  Plan a representative selection of locations, inventory and procedures to be covered in the count. .  Ensure sufficient attention is given to high value items.  Arrange to obtain from third parties (such as external warehousing companies) confirmation of inventory they hold.  Consider the need for expert help.

Organisation of the count

The auditor needs to organise the following:  Client supervision to be present on the count, including senior staff involved with inventory.  Tidying and marking inventory to help counting.  Restriction and control of the production process and inventory movements during the count.  Identification of damaged, obsolete, slow-moving, third party and returnable inventory.

Counting 5

Recording 6

Q

Best practice would require:  Systematic counting to ensure all inventory is counted.  Teams of two counters, with one counting and the other checking or alternatively holding two independent counts.

The following practice is normally adopted:  Serial numbering, control and return of all inventory sheets.  Inventory sheets to be completed in ink (or printed) and signed.  Information to be recorded on the count records (location and identity, count units, quantity counted, conditions of items, stage reached in the production process).  Recording of quantity, conditions and stage of production of work-inprogress.  Recording of last numbers of goods inwards and outwards and of internal transfer records.  Reconciliation with inventory records and investigation and correction of any difference.



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(d)

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The aim of a test of control is to check that an audit client’s internal control systems are operating effectively.

Q

The aim of a substantive procedure is to ensure that there are no material errors at the assertion level in the client’s financial statements. (ii)

Regarding the inventory count: Test of control Observe the count teams ensuring that they are counting in accordance with the client’s inventory count instructions. Substantive procedure Record the condition of items of inventory to ensure that the valuation of those items is correct on the final inventory summaries.

It does not do to dwell on dreams and forget to live. J.K. Rowling Harry Potter and the Sorcerer's Stone Harry Potter and the Philosopher's Stone Author J. K. Rowling Illustrators Thomas Taylor (UK) Mary GrandPré (US)



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Examiner’s Report You might find it useful to know what the Examiner reported about the quality of answers for this scenario. This was a 30 mark question and the rationale behind providing this small case study was two-fold: •

Firstly, to provided candidates with experience of attempting longer questions in preparation for the significant case studies that will be found in the professional level papers.

•

Secondly, to allow the examiner to effectively combine two 20 mark questions to use one scenario rather than two. The aim being to cut down the amount of reading and assimilation time candidates need to understand a question prior to preparing an answer.

Given the overall higher standard of answers in this exam, the second objective at least appears to have been met; whether the first has been achieved will depend on results to the Professional papers in future diets. The scenario itself was based on a computerised procurement and purchases system and the work of an auditor in attending the inventory count at a client. The purchases system was deliberately based on a computer system, in line with the comments made by the examiner in the study guide and at the 2007 lecturers’ conference. As in similar paper 2.6 examinations, candidates were expected to use the information in the scenario to provide relevant comments in their answers. Part (a) Candidates were required to use information concerning the purchases system provided in the scenario. The question was worth 12 marks, requiring the candidates to list audit procedures and then explain the reason for each procedure. The marking scheme was clear; six procedures were required with the procedure itself being worth 1 mark and the explanation of a procedure also being worth one mark. To obtain full marks candidates needed to provide six procedures meeting this criterion. Pass standard candidates provided between four and six good procedures, with some explanation of each procedure. However, only a minority of candidates demonstrated a good understanding of audit procedures and the reasons for those procedures. Many candidates struggled with the scenario, particularly regarding the use of the purchases system and partly in respect to the computerisation of that system. Candidates who recognised that basic audit procedures such as tracing information through a system or ensuring that details were recorded in specific ledgers or books did obtain a pass standard. Common errors and reasons why those errors did not obtain marks included:

Error

Reason for lack of marks

Testing the controls over the computer system such as passwords and backup systems

These were tests of the general controls over the computer rather than tests on the purchases system.



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Q

Error


Procedures relating to the payment of suppliers including recording of transactions in the cash book and supplier ledger accounts

These procedures related to the payments systems not the purchases systems. If the distinction was not clear to the candidate, payment systems were not mentioned within the scenario indicating that comments in this area were not relevant.

Procedures relating to cut-off.

This assertion relates to year-end testing of stock and purchases. The scenario was dated prior to the year-end making these comments not relevant.

Just stating an assertion word as a reason for performing a procedure.

This was generally not sufficient for an answer as it was not necessarily clear that the candidate understood the assertion , and in many cases stating an incorrect assertion. Providing a few words of explanation e.g. “confirming occurrence of purchases by agreeing purchase invoice details to the delivery notes, provided useful and relevant Explanation.

Writing out what the purchase system should do without actually stating any audit procedures. For example, stating that for all goods received there should be a three part delivery note raised. These comments showed good knowledge of systems but not of audit procedures.

No marks could be awarded because no audit procedure was actually stated. Mark earning comments would include observing the goods receipt system to ensure that goods receipt notes were raised, or reviewing a sample of goods receipt notes to ensure they were signed to confirm receipt of goods etc.

Other answers failed to provide sufficient detail to obtain either the procedure mark or the explanation mark. Many candidates also continued to “check” documents rather than actually show clear what procedures were. For example, typical comments in this respect were: • • •

Check the invoice Check the goods received note Check return of goods.

Unfortunately, it was not clear exactly what was being checked or why; more detail was needed to earn the procedure mark. For example, obtain details from a sample of purchase invoices and agree these to the purchase day book and ledger would form a valid procedure. Regarding the explanation mark, many candidates correctly attempted to link audit procedures to the audit assertions. However, the quoting of assertions was not always clear or accurate. For example: •

Suggesting that agreeing purchase order details to the inventory ledgers confirmed the completeness of invoices – when the correct assertion was occurrence.

•

Tracing details from the delivery note to the purchase order to confirm correct valuation of the invoice – the completeness assertion would normally be used here.

Finally, many comments related to procedures that either could not be carried out or were simply incorrect. For example: ©Tony Surridge Online Limited, 2013


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Q

Example “procedure”

Problem with “procedure”

Agreeing details from the purchase invoice to the goods held in the inventory store.

There are two problems with this comment: Firstly, goods received notes are normally used to update inventory, not purchase invoices. Secondly, it would be virtually impossible to agree details to the goods held – as the parts, etc. would have been used during the year in the manufacture of the items produced by the company.

Agreeing individual items of physical inventory to the goods inwards documentation.

Again, agreeing physical goods to the goods inwards documentation would be impossible – as noted above, the goods would be included in items manufactured by the company.

Tracing details of orders to the purchase day book.

Orders are normally agreed to the delivery notes, not the purchase day book. The latter is for recording the purchase invoices. So agreeing orders to purchase day book is not possible.

Overall, the standard of the answers for this basic auditing question was disappointing. Candidates and tutors are reminded of the importance of understanding sales, purchases and similar systems and the need to be able to provide clear audit procedures and explanation for those procedures. This will remain a key element of the audit and assurance examination. Part (b) Candidates were required to list four audit procedures that the auditor would perform prior to attending the inventory count at a client. The marking scheme for this question was therefore 0.5 mark for each procedure. The key difference between this sub-question and part (a) being the lack of need to relate those procedures to the scenario and therefore the award of 1 mark per point. Candidates tended to obtain either full marks or zero marks for this question, depending on whether or not they had read the question requirement correctly. The key word in the requirement was prior; a significant minority of candidates missed reading this word and listed procedures relevant to actually attending the inventory count; these procedures were unfortunately not relevant. Other common errors and reasons why those errors did not obtain marks included: Error


Not stating the procedure in sufficient detail

It was unclear what the procedure aimed to do. For example, contact client was insufficient for a procedure whereas contact client to obtain inventory count instructions was sufficient.

While not an error as such, many candidates wrote significant amounts of text in providing an answer to this section, in some cases easily exceeding one page of writing. Given that only four procedures had to be listed, this amount of writing was clearly inappropriate. Candidates and tutors need to understand that the requirement verb list is simply that; no explanation of the individual procedures was required to obtain the 0.5 mark for each procedure. Q ©Tony Surridge Online Limited, 2013


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Part (c) Q Candidates were required to list the weaknesses in the control system for counting inventory at one of the client depots and then explain the weakness and state how the weakness could be overcome. In other words, the question was based on a letter of weakness, although the specific format for that letter was not required. While not completely transparent, the marking scheme followed the convention of parts (a) and (b). The requirement verb was “list” indicating that simply the weakness was required to obtain a mark. In this case three procedures would provided the full 3 marks for sub-question (i) as those procedures had to be related to the scenario, as in part (a). This meant that there were 3 marks for each section in (ii) to explain the weakness (1.5 marks) and state how the weakness could be overcome (again 1.5 marks). A candidate providing valid weaknesses, with an explanation and method of overcoming that weakness could obtain full marks. The scheme was possibly generous in allowing 1.5 marks for explanation and recommendation. In practice, most candidates provided more than three weaknesses with some explanation and methods of overcoming each weakness. As the question requirement did not place any cap on the number of weaknesses that could be mentioned in the answer, all valid weaknesses were marked. This scheme allowed many candidates to obtain full marks in this section with most candidates deserving those marks as many clear and well thought out comments were made. For the future, where letter of weakness type questions are allowed, a cap will be placed on the number of weaknesses allowed to provide a clear and transparent guide to candidates. As already noted, the overall standard of answers to this section was high. The identification of weaknesses and how to respond to those weaknesses had clearly been well learned/taught enabling candidates to provide sound answers. The difficulty for many candidates appeared to be simply when to stop writing as the scenario did include six or seven key weaknesses where marks could be obtained. Following the published guidance from the examiner in this respect in the Examiner’s Approach may have helped provide this guidance. Common errors and reasons why those errors did not obtain marks included: Error


Not linking the explanation of the weakness to the weakness itself. For example, stating that the count sheets were completed in pencil and then stating that this did not provide an adequate segregation of duties.

To obtain the reason marks there had to be a clear link between the weakness and the reason for that weakness. For example, where count sheets were recorded in pencil then the weakness was those sheets could be amended easily to show incorrect inventory quantities – and there would be no record of that amendment.

Not linking the method of overcoming the weakness with the weakness itself. For example, stating that the count sheets were completed in pencil and then indicating that all sheets should be signed by a senior official.

To obtain the method of overcoming the weakness marks there had to be a clear link between the weakness and the method of alleviating that weakness.

Not necessarily thinking about the practicality or realism of the comments being made. For example, stating that the auditor would assign count teams to different areas of the depot.

In practice, the auditor is there to observe the inventory count, not organise it. Marks were generally not awarded where comments did not relate to the auditors’ standard work.

Overall, the question was well answered, with almost all candidates correctly using the information in the scenario . ©Tony Surridge Online Limited, 2013


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Part (d) Candidates were required to state the aim of a test of control and substantive procedure and then to provide examples of those tests/procedure with reference to inventory count attendance.

Q

The marking scheme for this question was simply 1 mark for each explanation and 1 mark for each test/procedure. As in parts (a) and (c), the test/procedure had to be linked to the specific scenario, hence 1 mark was available for each test/procedure rather than 0.5. This question turned out to be an unusually good discriminator of candidates. Many candidates obtained full marks, clearly demonstrating their knowledge of tests of control and substantive audit procedures. However, a significant minority of candidates either did not attempt the question or scored zero points due to poor and incorrect explanation and examples. Common errors and reasons why those errors did not obtain marks included: Error


Explaining substantive audit procedures as being used when tests of controls were not available or had failed.

While the reason for using substantive procedures may have been partly correct, the reason for the procedure in terms of validating balance sheet assertions was not mentioned.

Explaining tests of controls as substantive test and substantive tests as tests of controls. For example, stating that ensuring all count sheets were signed was a substantive test or agreeing the quantities of inventory to the inventory ledgers.

No marks could be awarded because the example was incorrect.

Providing examples not relevant to the inventory count, for example, confirmation of balances in the suppliers’ ledger or other substantive tests on purchasing system.

The question requirement clearly stated examples had to be provided from the inventory count, therefore these points were not relevant.

The auditor is a watchdog and not a bloodhound. Lord Justice Lopes Henry Charles Lopes, 1st Baron Ludlow PC, QC (3 October 1828-25 December 1899), was a British judge and Conservative Party politician. Ludlow was a younger son of Sir Ralph Lopes, 2nd Baronet, and the uncle of Henry Lopes, 1st Baron Roborough. He was educated at Winchester and Balliol College, Oxford, and was called to the Bar, Inner Temple, in 1852. Ludlow sat as Member of Parliament for Launceston from 1868 to 1874 and for Frome from 1874 to 1876. He was also a Recorder of Exeter from 1867 to 1876 and became a Queen's Counsel in 1868. In 1876 he was appointed a Justice of the Common Pleas Division of the High Court of Justice, a post he held until 1880, and then served as a Lord Justice of Appeal from 1885 to 1897. Lopes was knighted in 1876 and sworn of the Privy Council in 1885. In 1897 he was raised to the peerage as Baron Ludlow, of Heywood in the County of Wiltshire. ©Tony Surridge Online Limited, 2013


Lord Justice Lopes

Q 80


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Section B: INTERNAL AUDIT

1. Internal audit and corporate governance 2. Differences between external and internal audit 3. The scope of the internal audit function 4. Outsourcing the internal audit department 5. Internal audit assignments



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Syllabus Section B: Internal Audit Title

Screen 938

Question Office Equipment and Furniture Answer

A question covering the relations between internal and external audit work Office Equipment and Furniture

Question WindHopper Airline

939 941

A question covering the extent to which the external auditor can rely on the work on the internal auditor Answer WindHopper Airline Question Fix It! Company A question covering the issues concerning the work of internal auditors Answer Fix It! Company Question Newingreen Industrial Co A question covering the issues involved in outsourcing internal audit responsibilities Answer Newingreen Industrial Co

942 944 945 947 948

Note:

No Questions and Answers have been made active for the free sample.

In short, we have, among African countries, a duty of solidarity. Omar Bongo El Hadj Omar Bongo Ondimba (1935 – 2009), born as Albert-Bernard Bongo, was a Gabonese politician who was President of Gabon for 42 years from 1967 until his death in office in 2009.



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Section C: PLANNING AND RISK ASSESSMENT

1. 2. 3. 4. 5. 6. 7.

Objective and general principles Understanding the entity and knowledge of the business Assessing the risks of material misstatement and fraud Analytical procedures Planning an audit Audit documentation The work of others



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Syllabus Section C: Planning and Risk Assessment Title

Screen 952

Question Fordcon Textiles Answer Question

Answer Question Answer Question Answer Question Answer Question Answer

A question covering audit planning Fordcon Textiles ExpoZ A question covering understanding the entity and its environment, assessing risk of material misstatements and the features of audit working papers ExpoZ Spectrual Gemstones Company A question covering inventory and the auditor’s external agent Spectrual Gemstones Company CallV Company A question covering audit acceptance and the engagement letter CallV Company LinkZ Company A question covering risk assessment and audit procedures LinkZ Company Guston Company A question covering the assessment of inherent and control risk and the design of specific audit procedures Guston Company

953 957

958 961 962 964 965 967 968 970 971

Question Link Arms Charity

974

A question covering inherent, control and detection risk and associated audit tests Answer Link Arms Charity Question SeeUs Company A question covering audit documentation Answer SeeUs Company

975 977 978

It's the job that's never started takes longest to finish.

J. R. R. Tolkien

J. R. R. Tolkien 1916

John Ronald Reuel Tolkien (1892 – 1973) was an English writer, poet, philologist, and university professor, best known as the author of the classic high fantasy works The Hobbit, The Lord of the Rings, and The Silmarillion.



Note:


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Section D: INTERNAL CONTROL

1. 2. 3. 4. 5. 6.

Internal control systems The use of internal control systems by auditors Transaction cycles Tests of control The evaluation of internal control components Communication on internal control



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Syllabus Section D: Internal Control Title Question DustUp Company A question covering risk and internal controls assessment Answer DustUp Company Question PlastU Company A question covering assessment of internal controls Answer PlastU Company Question Express AM Company A question covering problems resulting from poor internal controls and associated recommendations Answer Express AM Company Question Internal Controls A question covering adherence to management policies, safeguarding of assets, the prevention of fraud and error and the completeness and accuracy of the accounting records and audit sampling Answer Internal Controls Question ShoesR Company A question covering risk assessment and internal control Answer ShoesR Company Question Ashley Enterprise (AE) Company A question covering control objectives and audit tests carried out a sales and despatch system Answer Ashley Enterprise (AE) Company

Screen 982 983 986 987 989 990 992

993 995 996 998 999

Note:


You cannot shake hands with a clenched fist. Indira Gandhi



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Section E: AUDIT EVIDENCE

1. 2. 3. 4. 5. 6.

The use of assertions by auditors Audit procedures The audit of specific items Audit sampling and other means of testing Computer-assisted audit techniques Not-for-profit organisations



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Syllabus Section E: Audit Evidence Title Question Training Material A question covering audit purpose, procedures and processes Answer Training Material Question Audit Evidence Answer Question Answer Question Answer Question Answer Question Answer

Answer Question Answer Question Answer Question

1008 1011 1012 1014 1016 1019 1020 1022 1023 1026

A question covering occurrence, completeness and measurement testing Watch & Black BigginWood A question covering audit sampling BigginWood IAS2, Inventories A question covering the valuation of inventory IAS2, Inventories 4-U Beds Company A question covering inventory and auditing issues 4-U Beds Company Sodafizz Company A question covering different audit tests

Answer Sodafizz Company Question BurgerQueen Company Answer

1005 1007

A question covering the methods of obtaining audit evidence Audit Evidence TeddyMax Company A question covering five procedures used for gathering audit evidence TeddyMax Company Ethel Bancroft A question covering aspects concerning the audit of a charity Ethel Bancroft Greenway Tennis Club A question covering the audit of a not-for-profit entity Greenway Tennis Club Small Entities A question covering the audit of small entities Small Entities

Question Watch & Black Answer Question

Screen 1004

1028 1032 1034 1038 1039 1042 1043 1045 1046 1048

A question covering the audit of accounts payable and accruals BurgerQueen Company

1049

Note:

1 OF 2

No Questions and Answers have been made active for the free sample. ©Tony Surridge Online Limited, 2013


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Syllabus Section E: Audit Evidence Title Question Furnital Company A question covering sufficiency of audit evidence and substance audit procedures Answer Furnital Company Question Analytical Procedures Answer Question Answer Question Answer Question Answer Question Answer

Screen 1052 1053 1056

A question covering analytical procedures and concept of materiality and its implications Analytical Procedures Jacobson Gravel (JB) Company A question covering audit work and analysing stated figures Jacobson Gravel (JB) Company Barton, Rialto, Goodsel, Wright and Conibear A question covering materiality considerations, relevant accounting principles and appropriate accounting standards Barton, Rialto, Goodsel, Wright and Conibear Confirmations A question covering the audit evidence provided by confirmations Confirmations DK Electronics A question covering computer application controls DK Electronics

Question Leadworks Quays

1057 1059 1060 1062 1064 1068 1069 1072 1074 1079

A question covering general controls in a computer environment Answer Leadworks Quays Question Lympne Industrials A question covering ‘test data’ and Computer Assisted Audit Techniques Answer Lympne Industrials Question DriveU Company A question covering Computer Assisted Audit Techniques Answer DriveU Company

1081 1084 1086 1091 1092

2 OF 2

After climbing a great hill, one only finds that there are many more hills to climb. Nelson Mandela



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Section F: REVIEW

1. 2. 3. 4.

Subsequent events Going concern Management representations Audit finalisation and the final review



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Syllabus Section F: Review Title Question Injan Computers Company A question covering and analytical procedure and consideration of going concern Answer Injan Computers Company Question OrganZ Company

Screen 1096 1099 1102

A question covering issues concerning ethical threats of going concern Answer OrganZ Company Question Caddymol Retailers A question covering subsequent events Answer Caddymol Retailers Question FrostLand Supermarkets A question covering audit objectives and the auditor’s responsibilities with regard to subsequent events Answer FrostLand Supermarkets Question Wolfe Incorporated A question covering the management representation letter Answer Wolfe Incorporated

1103 1105 1106 1110 1111 1113 1114

Note:


‘I am inclined to think - ‘ said I [Dr Watson]. ‘I should do so,’ Sherlock Holmes remarked, impatiently. Arthur Conan Doyle, 1859 - 1930 The Valley of Fear (1915)



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Section G: REPORTING

1. Audit reports 2. Reports to management 3. Internal audit reports



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Syllabus Section G: Reporting Title

Screen 1118

Question ABC Company A question covering audit and review reports Answer ABC Company

1120

Question MCA Industrials Company A question covering the auditor’s report and audit procedures Answer MCA Industrials Company Question Audit Reports A question covering internal and external audit reports Answer Audit Reports Question TQR Transporters A question covering the management representation letter Answer TQR Transporters Question AG Industrials Company A question covering the responsibilities of directors and auditors, the contents of the audit report and the difference between positive and negative assurance Answer AG Industrials Company

1122 1123 1125 1126 1128 1129 1131

1132

Note:


He: She He: She: He:

We met at nine We met at eight I was on time No, you were late Ah yes! I remember it well.

Alan Jay Lerner, 1918-86 ‘I Remember It Well’ (1957)



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+AddVance ACCA F8 Questions and Answers

Main Contents Study classification

Screen

Multiple Choice Questions and Answers

1135

Short Questions and Answers: International Standards on Auditing

1136

Diagnostic Questions and Answers

1137

Exam Status Questions and Answers

1138


1532

Did you know? From 1986 poetry became and remains a familiar sight on London Underground’s trains and posters. One of the first poems to be published on the Underground was Wordsworth’s ‘Composed Upon Westminster Bridge’ which prompted twenty people to gather on the bridge at dawn on 3rd September 1986, the 184th anniversary of the poems composition, to read it aloud. Source: Stephen Halliday, ‘London Underground Facts, ‘D&C’.



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Contents: Multiple Choice Questions and Answers Screen Section section

Syllabus classification Questions

Answers

Number of Q&As

A

Audit Framework and Regulation

20

29

27

B

Internal Audit

43

45

3

C

Planning and Risk Assessment

48

69

77

D

Internal Control

104

119

55

E

Audit Evidence

141

165

20

F

Review

206

213

20

G

Reporting

221

223

2

Total number of Multiple Choice Questions and Answers

204

Did you know? In Greek myth, the Amazons were a race of mounted women warriors who lived near the Black Sea. Expert riders and archers, they displayed their fighting abilities in raiding expeditions. They kept men as slaves for procreation. It was said that any male off-spring of these unions were abandoned to die, while the girls were bought up to be warriors like their mothers.

A woodcut depicting defeated Greeks being cruelly executed by Amazons. ©Tony Surridge Online Limited, 2013


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Contents: ISA Short Questions and Answers Screen International Standard on Auditing Questions

Answers

ISA 200

225

229

15

ISA 210

237

240

9

ISA 230

245

248

11

ISA 240

307

313

14

ISA 250

327

330

10

ISA 260

334

338

11

ISA 265

344

347

7

ISA 300

351

354

14

ISA 315

359

367

33

ISA 320

386

389

7

ISA 330

393

399

28

ISA 402

409

413

12

ISA 450

420

423

11

ISA 500

428

433

23

ISA 501

442

447

21

ISA 505

454

458

19

ISA 510

464

467

10

ISA 520

473

476

11

ISA 530

481

486

15

ISA 540

495

501

25

ISA 560

511

514

11

ISA 570

519

523

11

ISA 580

528

532

8

ISA 610

538

541

6

ISA 620

545

549

13

ISA 700

557

562

13

ISA 705

568

578

21

ISA 706

586

590

9

ISA 710

594

597

7

ISA 720

600

602

5

Total number of ISA Short Questions and Answers ©Tony Surridge Online Limited, 2013


410 96


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Contents: Diagnostic Questions and Answers Screen Questions

Answers

Number of Q&As


605

618

56

B

Internal Audit

653

658

21

C


672

687

34

D

Internal Control

728

748

28

E

Audit Evidence

803

820

30

F

Review

873

876

4

G

Reporting

883

890

7

Syllabus section

Syllabus classification

A

Total number of Diagnostic Questions and Answers

180

Did you know? An arch was a ceremonial gateway, a triumphal feature of Roman architecture, recalling the ancient Classical associations of the arch with the sky and its supreme god Zeus. Initiates passing under an arch symbolically leave their former lives, hence the ceremonial arches formed for newlyweds.



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Contents: Exam Status Questions and Answers Syllabus section

Syllabus classification

Contact screen

Number of Q&As

A


901

10

B

Internal Audit

936

4

C


950

8

D

Internal Control

980

6

E

Audit Evidence

1001

21

F

Review

1094

5

G

Reporting

1116

5

Total number of Exam Status Questions and Answers

59

Did you know? Aristotle (384 - 322 BC) was a Greek philosopher, scientist and pupil of Plato. A tutor of Alexander the Great, a medieval legend relates how he expounded that women were the downfall of men and tried to persuade Alexander to abandon his favourite courtesan, Campaspe. In revenge Campaspe charmed the old philosopher. To prove his love, she insisted that Aristotle allow her to ride on his back, and Alexander saw how a woman could undo the wisest of men. The subject was often painted on domestic furniture along with related themes, such as Samson and Delilah. Apelles paints Campaspe, mistress of Alexander the Great, also called Indiscrete love, 1716. ©Tony Surridge Online Limited, 2013


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PAST EXAM QUESTIONS AND ANSWERS

Click to the next screen



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Contents: Past Exam Q&As – 1 of 8 Wesestra Co: Pilot Paper

Question

Answer plan

Answer

Examiner’s report

1081

1082

1085

n/a

1091

1092

1094

n/a

1097

1098

1100

n/a

1102

1103

1105

n/a

1107

1108

1110

n/a

1112

1114

1117

1121

1126

1127

1128

1129

1131

1132

1133

1135

1138

1139

1141

1143

Substantive audit procedures to confirm assertions. Audit procedures on the trade payables balance. Control procedures over standing data. Extent to which CAATs might be used.

ISAs 210/500/700: Pilot Paper Items to be included in an engagement letter. Types of audit evidence. Ways in which an auditor’s report may be modified.

Dark and Co: Pilot Paper Threat to independence. Corporate governance requirements. Communication with an audit committee.

SouthLea Co: Pilot Paper Weaknesses in a system of internal control. Responsibilities of external/internal auditors to detect fraud. Factors an entity should consider when appointing an external consultant.

EastVale Co: Pilot Paper Additional audit procedures. Amendments to financial statements. Whether or not an audit report should be modified.

DinZee Company: December 2007 Audit procedures – on a purchase system. Procedures prior to an inventory count. Weaknesses detected in a control system for counting inventory and related discussion.

ACCA Code: December 2007 Actions of the auditor to ascertain going concern.

Matalas Co : December 2007 Issues which limit the independence of the internal audit department. Internal control weaknesses in a petty cash system.

Delphic Co: December 2007 Procedures when using audit software on a receivables balance. Potential problems of using audit software. The concept of ‘auditing around the computer’ and associated audit risk.

Our Answers are based on the ACCA Official solutions but extended to include tutorial guidelines (in green shaded boxes) to aid understanding as well as the use of hyperlinks to glossary terms and external sources. Note: the ACCA Official solutions are available free of charge on www.accaglobal.com.



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Contents: Past Exam Q&As – 2 of 8 JonArc & Co: December 2007

Question

Answer plan

Answer

Examiner’s report

1146

1147

1149

1151

1154

1156

1159

1161

1166

1167

1169

1173

1176

1177

1179

1183

1186

1187

1189

1191

1193

1194

1197

1199

1202

1204

1206

1209

Audit procedures regarding non-deprecation of buildings. Meaning and purposes of extracts in a draft audit report. Effect on an audit report of two alternative situations.

Brennon & Co: June 2008 Checking the accuracy of an internal control questionnaire. Six tests of control re a despatch and sales system. Four assertions that relate to the direct confirmation of receivables. Procedures re a direct confirmation of receivables. Deciding on a sample for categories of receivables.

Sufficiency of evidence: June 2008 Four factors regarding the sufficiency of evidence obtained. Six items that could be included in a management representation letter. Actions required when audit evidence is not considered to be sufficient to support the audit opinion.

ISA 520: June 2008 Discussion re ‘analytical procedures’ – explanation of, procedures available and situations where applicable. Analysing changes in a presented income statement covering two years. Procedures to obtain a bank confirmation letter.

MonteHodge Co: June 2008 Advantages/disadvantages of an entity outsourcing an internal audit department. By using a stated situation a discussion of the reasons for and against an entity having an internal audit department.

Smithson Co: June 2008 The auditor’s responsibilities in respect of ‘Going concern’. Audit procedures to determine going concern. Procedures in a case when the client is unlikely to be a going concern. Explanation/implication of the term ‘negative assurance’.

Blake Co: December 2008 Control objectives of a wages system. Identification and discussion of four weaknesses in a (described) wages recording and payment system. Three substantive analytical procedures re a shift managers’ salary system. Four audit procedures in respect of testing the accuracy of the time recording system.




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Contents: Past Exam Q&As – 3 of 8 ISA 620: December 2008

Question

Answer plan

Answer

Examiner’s report

1213

1214

1216

1217

1219

1220

1222

1224

1226

1227

1229

1231

1233

1234

1236

1238

1240

1242

1246

1249

1253

1254

1255

1256

1258

1259

1261

1264

1266

1267

1268

1271

Three factors re assessing the competence and objectivity of an auditor’s expert. Three rights that enable auditors to carry out their duties. Four assertions relevant to the audit of non-current assets and one related audit procedure.

Ali & Co: December 2008 Discussion and mitigation of ethical threats which may affect an auditor . Benefits of an entity establishing an internal audit department.

The EuKaRe Charity: December 2008 Areas of inherent risk and the effect of these risks. Explanation as to why a (described) control environment may be weak.

ZeeDiem Co: December 2008 Adjusting or non-adjusting events? (IAS 10). The auditor’s responsibility/procedures that should be carried out according to ISA 560.

B-Star Theme Park: June 2009 Purpose of the main sections of an audit strategy document. Risks that could affect the assertion of completeness and associated controls and substantive procedures. Substantive procedures re total income from ticket sales for one day and one year. Audit procedures on a credit card receivables balance.

ISAs 530/500: June 2009 Four methods of selecting a sample (ISA 530). Four assertions from ISA 500 that relate to the recording of classes of transactions. In terms of audit reports explanation of the term ‘modified’.

Cal & Co: June 2009 Benefits of using audit software. Problems that may be encountered in the audit of described (computer) situations and explanation of how these problems may be overcome. Evaluation of computer systems documentation.

Conoy Co: June 2009 Contrasting the role of internal and external auditors. Benefits to an entity of forming an audit committee.




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Contents: Past Exam Q&As – 4 of 8 Tye Co: June 2009

Question

Answer plan

Answer

Examiner’s report

1273

1274

1276

1278

1280

1281

1284

1289

1291

1292

1294

1296

1297

1298

1300

1303

1304

1305

1307

1309

1311

1312

1314

1317

1318

1320

1323

1328

1330

1331

1332

1333

Audit procedures/actions in respect of aviation fuel inventory. External auditor’s responsibilities regarding the detection of fraud and reporting of ‘fictitious’ aviation fuel inventory. Safeguards to overcome the intimidation threat from a client’s directors.

Redburn Co: December 2009 Two procedures to ensure that sales statistics may be relied on. Three substantive tests to ensure that a royalties charge is accurate and complete. Two inherent risks that may affect an inventory figure and one mitigation control. Definition/procedures re net realisable value.

ISAs 500/260: December 2009 Four factors that influence the reliability of audit evidence. Two specific responsibilities of those charged with governance and four examples of matters that might be communicated to such people by the auditors.

Letham Co: December 2009 Understanding the entity and its environment. Six strengths in a (described) control environment in respect of noncurrent assets. Explanation/discussion of a test for completeness.

Brampton Co: December 2009 Reliance on the work on internal auditors. Three procedures in an examination of a cash flow forecast. Providing assurance.

Have a Bite Co: December 2009 Two controls concerning purchases and two associated audit procedures. Three items of evidence concerning a (described) potential claim and how the matter should be reported in the financial statements/audit report.

Smoothbrush Paints Co: June 2010 Audit risks identified at the audit planning stage. Discussion of the importance of assessing such risks. Suitable controls that should exist over a continuous/perpetual inventory counting system. Three substantive procedures for each of (i) the valuation of inventory, and (ii) the completeness of provisions or contingent liabilities.

Non-audit engagements/ISA 320: June 2010 The elements of an assurance engagement. Definition of materiality and determination of how the level of materiality is assessed.

Our Answers are based on the ACCA Official solutions but extended to include tutorial guidelines (in green shaded boxes) to aid understanding as well as the use of hyperlinks to glossary terms and external sources. Note: the ACCA Official solutions are available free of charge on www.accaglobal.com. ©Tony Surridge Online Limited, 2013


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Contents: Past Exam Q&As – 5 of 8 Shiny Happy Windows Co: June 2010

Question

Answer plan

Answer

Examiner’s report

1334

1335

1337

1339

1341

1342

1344

1347

1348

1349

1353

1356

1358

1360

1363

1370

1372

1373

1375

1376

1377

1378

1381

1384

Definition of (i) a ‘test of control’, and (ii) a ’substantive procedure’. Three deficiencies in a (described) system and controls required to address them. Audit test of controls to assess if controls are operating effectively. Substantive procedures performed to verify a company’s bank balance.

Jones & Co: June 2010 Five audit threats (ACCA’s Code) and an example of a circumstance that may create each of the threats. Independence threats (using a described scenario) and how each threat might be avoided. Steps of an audit firm prior to accepting a new audit engagement.

Medimade Co: June 2010 Definition of the going concern assumption. Identification of indicators that a (described) company is not a going concern. Audit procedures in assessing whether or not a company is a going concern. Impact on the audit report if the auditor believes the client is a going concern but a material uncertainty exists.

Greystone Co: December 2010 Matters concerning a deficiency in internal controls (ISA 265). Four deficiencies in a (described) purchasing system, implications of and recommendation to address each deficiency. Substantive procedures on year-end payables. Additional assignments that the internal audit department could be asked to perform.

General auditing aspects: December 2010 Explanation of the concept of TRUE and FAIR. Status of International Standards on Auditing. Four benefits of documenting audit work (ISA 230).

White & Co: December 2010 Assessment of whether the pre-conditions of an audit are present. Four matters when obtaining an understanding of the entity. Calculation of five ratios, for each of two years, which would assist the audit senior in planning the audit. (A described scenario).Explain the audit risks that arise from the scenario with appropriate audit response.




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Contents: Past Exam Q&As – 6 of 8 Bluesberry Hospital: December 2010

Question

Answer plan

Answer

Examiner’s report

1386

1387

1389

1392

1393

1394

1397

1399

1401

1402

1405

1408

1410

1411

1413

1415

1416

1417

1419

1422

1424

1425

1427

1430

Identification of four strengths within a (described) operating environment and how the client might use each strength to provide the best value for money. Description of two substantive procedures used to verify each of the following assertions in relation to an entity’s property, plant and equipment: (i) valuation, (ii) completeness and (iii) rights and obligations.

Greenfields Co: December 2010 Audit procedures in respect of accounting estimates. The appropriateness of written representation as a form of audit evidence. Reaching a conclusion on a (described) balance in the financial statements. Implications of the refusal of management to provide a requested written representation.

Tinkerbell Toys Co: June 2011 Six tests of controls on the (described) sales systems with explanation of the objective for each test. Substantive procedures to confirm year-end receivables balance. Identification and explanation of controls used to reduce the risk of fraud and how each control would mitigate the risk. Substantive procedures performed to confirm revenue.

Audit documentation: June 2011 Advantages/disadvantages to the auditor of (i) narrative notes and (ii) internal control questionnaires. Purposes of an engagement letter and six matters that should be included within an audit engagement letter.

Donald Co: June 2011 Five procedures for obtaining audit evidence and for each an example relevant to the audit of purchases and other expenses. From information provided a description of five audit risks and the auditor’s response to each risk in planning the audit.

Goofy Co: June 2011 Safeguards for auditors to ensure that conflict of interest is properly managed. Advantages/disadvantages to both client and auditor of outsourcing the internal audit department. From information provided an explanation of ethical threats to the audit independence and how each threat may be reduced.




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Contents: Past Exam Q&As – 7 of 8 Daffy & Co: June 2011

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Examiner’s report

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‘Misstatement’ and the auditor’s responsibility. Factors that an entity should consider when placing reliance on the work of an independent valuer. Discussion of three (provided) issues and their impact on the audit report if they remain unresolved.

Chuck Industries: December 2011 For deficiencies already identified (i) an explanation of implications and (ii) recommendation to address each deficiency. Substantive procedures to confirm accuracy and completeness of a (described) payroll charge. Responsibilities of management/auditors in relation to compliance with law and regulations (ISA 250). Substantive procedures to confirm a redundancy provision. Factors considered by the auditor before reliance can be placed on the work performed by a client’s internal audit department.

ISAs 315/700: December 2011 Five components of an entity’s internal control with an explanation of each. Five elements of an unmodified auditor’s report.

Abrahams Co: December 2011 Description of the component of audit risk with an example of a factor which can result in increased audit risk. Using information provided identification/description of five audit risks and the auditor’s response to each. Substantive procedures used to obtain sufficient appropriate audit evidence in relation to: (i) inventory held by a third party, and (ii) use of standard costs for inventory valuation.

Serena VDW Co: December 2011 Explanation/importance of ‘corporate governance’. Description of six corporate governance weaknesses (using a provided scenario) and recommendations to address each weakness. The auditor’s ethical responsibilities with regard to client confidentiality and when they have (i) obligatory obligations, and (ii) voluntary responsibility to disclose client information.

Humphries Co: December 2011 The auditor’s responsibility for subsequent events. For each of three provided events: (i) discussion of whether financial statements require amendment, (ii) description of audit procedures to form a conclusion on the amendment, and (iii) the impact on the audit report should the issue remain unresolved.




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Contents: Past Exam Q&As – 8 of 8 Pear International Co: June 2012

Question

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1501

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In respect of the internal control (scenario provided) (i) identification/ explanation of five deficiencies, (ii) recommendation of a control to address each and (iii) a test of control to assess if each of these controls is operating effectively. Substantive procedures to confirm each of the following for plant and equipment: (i) additions, and (ii) disposals. Identification/explanation of the level of assurance provided by external audit/other review engagements. Contrast of internal/external audit.

ISAs 300/530: June 2012 Explanation of the benefits of audit planning. Identification/explanation of three methods of selecting a sample. Description of the three types of modified audit opinions.

Orange Financial Co: June 2012 From a scenario provided an explanation of six ethical threats which might affect audit independence and how each might be reduced to an acceptable level. Benefits to an organisation of establishing an audit committee.

Pineapple Beach Hotel Co: June 2012 Identification of four financial statement assertions relevant to year-end account balances and for each a description of a substantive procedure relevant to the audit of year-end inventory. Substantive procedures relevant to obtain sufficient/appropriate audit evidence in relation to two stated issues. Four items that should be included on every audit working paper.

Strawberry Kitchen Designs Co: June 2012 Three stages of an audit when analytical procedures can be used by the auditor. Using information provided an explanation of three potential indicators that the entity is not a going concern, Audit procedures in assessing whether or not a company is a going concern. The auditor’s responsibility for reporting on going concern to management. The impact on the auditor’s report if management refuse to amend the financial statements.




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Appendix A:

International Standards on Auditing: June and December 2013 Examinations – 1 of 5

The following six screens itemise the International Audit Standards and other examinable documents for the June and December 2013 examinations. Reference is made to them as applicable in the body of this Tony Surridge +AddVance e-publication. Hyperlinks are provided both on the following screens or when referred to in the text.



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EXAMINABLE DOCUMENTS JUNE AND DECEMBER 2013 AUDIT INTERNATIONAL – 2 of 5 Knowledge of new examinable regulations issued by 30th September will be examinable in examination sessions being held in the following calendar year. Documents may be examinable even if the effective date is in the future. This means that all regulations issued by 30th September 2012 will be examinable in the June and December 2013 examinations. The study guide offers more detailed guidance on the depth and level at which the examinable documents should be examined. The study guide should therefore be read in conjunction with the examinable documents list.

Accounting Standards Paper F8 Audit and Assurance The accounting knowledge that is assumed for Paper F8 is the same as that examined in Paper F3. Therefore, candidates studying for Paper F8 should refer to the Accounting Standards listed under Paper F3.

Click here

Title

F8

International Standards on Auditing (ISAs) CLICK

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Glossary of Terms http://web.ifac.org/download/2009_Auditing_Handbook_A005_Glossary.pdf

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International Framework for Assurance Assignments

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http://web.ifac.org/download/2008_Auditing_Handbook_A055_Framework. pdf

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Preface to the International Standards on Quality Control, Auditing, Review, Other Assurance and Related Services

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http://web.ifac.org/download/2009_Auditing_Handbook_A004_2009_Prefa ce-WithConformingAmendments.pdf

ISA 200

Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing

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http://web.ifac.org/download/2009_Auditing_Handbook_A008_ISA_200.pdf

ISA 210

Agreeing the Terms of Audit Engagements http://web.ifac.org/download/2009_Auditing_Handbook_A009_ISA_ 210.pdf



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EXAMINABLE DOCUMENTS JUNE AND DECEMBER 2013 AUDIT INTERNATIONAL - 3 of 5 Click here

Title

F8

ISA 230

(Redrafted) Audit Documentation

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ISA 240

(Redrafted) The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements

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ISA 250

(Redrafted) Consideration of Laws and Regulations in an Audit of Financial Statements

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ISA 260

(Revised and Redrafted) Communication with Those Charged with Governance

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ISA 265

Communicating Deficiencies in Internal Control to those Charged with Governance and Management

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ISA 300

(Redrafted) Planning an Audit of Financial Statements

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ISA 315

(Redrafted) Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment

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ISA 320

Materiality in Planning and Performing and Audit

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ISA 330

(Redrafted) The Auditor’s Responses to Assessed Risks

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ISA 402

Audit Considerations Relating to an Entity Using a Service Organisation

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ISA 450

Evaluation of Misstatements Identified During the Audit

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EXAMINABLE DOCUMENTS JUNE AND DECEMBER 2013 AUDIT INTERNATIONAL – 4 of 5

Click here

Title

ISA 500

Audit Evidence

F8 √


ISA 501

Audit Evidence – Specific Considerations for Selected Items

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ISA 505

External Confirmations

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ISA 510

(Redrafted) Initial Audit Engagements – Opening Balances

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ISA 520

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Analytical Procedures http://web.ifac.org/download/2009_Auditing_Handbook_A026_ISA_520.pdf

ISA 530

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Audit Sampling http://web.ifac.org/download/2009_Auditing_Handbook_A027_ISA_530.pdf

ISA 540

(Revised and Redrafted) Auditing Accounting Estimates, Including Fair Value Estimates and Related Disclosures

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ISA 560

(Redrafted) Subsequent Events

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ISA 570

(Redrafted) Going Concern

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ISA 580

(Revised and Redrafted) Written Representations

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ISA 610

Using the Work of Internal Auditors

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ISA 620

Using the Work of an Auditor’s Expert

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EXAMINABLE DOCUMENTS JUNE AND DECEMBER 2013 AUDIT INTERNATIONAL – 5 of 5 ISA 700

Forming an Opinion and Reporting on Financial Statements

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ISA 705

Modifications to the Opinion in the Independent Auditor’s Report

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ISA 706

Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

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ISA 710

Comparative Information – Corresponding Figures and Comparative Financial Statements

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ISA 720

(Redrafted) The Auditor’s Responsibilities Related to Other Information in Documents Containing Audited Financial Statements

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International Standards on Assurance Engagements (ISAEs) ISAE 3000

Assurance Engagements other than Audits or Reviews of Historical Financial Information

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http://web.ifac.org/download/2008_Auditing_Handbook_A270_ISAE_3000. pdf

Other documents CLICK

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ACCA’s ‘Code of Ethics and Conduct’ http://rulebook.accaglobal.com/

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IFAC’s ‘Code of Ethics for Professional Accountants’ http://web.ifac.org/download/2008_Auditing_Handbook_A025_Code_of_Et hics.pdf

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UK Code of Corporate Governance 2012 as an example of a code of best practice

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http://www.frc.org.uk/getattachment/b0832de2-5c94-48c0-b771ebb249fe1fec/The-UK-Corporate-Governance-Code.aspx

Moral codes adjust themselves to environmental conditions” Will Durant William James Durant (1885 – 1981) was a prolific American writer, historian, and philosopher. He is best known for The Story of Civilization, 11 volumes written in collaboration with his wife Ariel Durant and published between 1935 and 1975. He was earlier noted for The Story of Philosophy, written in 1926, which one observer described as "a groundbreaking work that helped to popularize philosophy". Will and Ariel Durant ©Tony Surridge Online Limited, 2013


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APPENDIX B:

GLOSSARY OF TERMS (* International Auditing and Assurance Standards Board [IAASB] - February 2009)

A

B

C

D

E

F

G

H

I

J

K

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M

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W

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Access controls* Procedures designed to restrict access to on-line terminal devices, programs and data. Access controls consist of “user authentication” and “user authorisation.” “User authentication” typically attempts to identify a user through unique logon identifications, passwords, access cards or biometric data. “User authorisation” consists of access rules to determine the computer resources each user may access. Specifically, such procedures are designed to prevent or detect: (a) (b) (c) (d) (e)

Unauthorised access to on-line terminal devices, programs and data; Entry of unauthorised transactions; Unauthorised changes to data files; The use of computer programs by unauthorised personnel; and The use of computer programs that have not been authorised.

Accounting estimate* An approximation of a monetary amount in the absence of a precise means of measurement. This term is used for an amount measured at fair value where there is estimation uncertainty, as well as for other amounts that require estimation. Where ISA 540 addresses only accounting estimates involving measurement at fair value, the term “fair value accounting estimates” is used. Accounting records* The records of initial accounting entries and supporting records, such as cheques and records of electronic fund transfers; invoices; contracts; the general and subsidiary ledgers, journal entries and other adjustments to the financial statements that are not reflected in formal journal entries; and records such as work sheets and spreadsheets supporting cost allocations, computations, reconciliations and disclosures. Accrued revenue This is revenue that has been credited but not yet paid. Adverse opinion When the auditor expresses an adverse opinion, the auditor shall state in the opinion paragraph that, in the auditor’s opinion, because of the significance of the matter(s) described in the Basis for Adverse Opinion paragraph: (a) The financial statements do not present fairly (or give a true and fair view) in accordance with the applicable financial reporting framework when reporting in accordance with a fair presentation framework; or (b) The financial statements have not been prepared, in all material respects, in accordance with the applicable financial reporting framework when reporting in accordance with a compliance framework. An adverse opinion is expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements. Agent An agent is authorised to act on behalf of another (called the Principal) Agree To confirm that balances in the general ledger are correct. Agreed-upon procedures engagement* An engagement in which an auditor is engaged to carry out those procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings. The recipients of the report form their own conclusions from the report by the auditor. The report is restricted to those parties that have agreed to the procedures to be performed since others, unaware of the reasons for the procedures may misinterpret the results. www.tonysurridge.co.uk ©Tony Surridge Online Limited, 2013 114


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Analyse Separation of account balances into separate parts and the ascertainment of those parts. Analytical procedures* Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data. Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount. Annual report* A document issued by an entity, ordinarily on an annual basis, which includes its financial statements together with the auditor’s report thereon. Anomaly* A misstatement or deviation that is demonstrably not representative of misstatements or deviations in a population. Applicable financial reporting framework* The financial reporting framework adopted by management and, where appropriate, those charged with governance in the preparation of the financial statements that is acceptable in view of the nature of the entity and the objective of the financial statements, or that is required by law or regulation. The term “fair presentation framework” is used to refer to a financial reporting framework that requires compliance with the requirements of the framework and: (a) Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be necessary for management to provide disclosures beyond those specifically required by the framework; or (b) Acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial statements. Such departures are expected to be necessary only in extremely rare circumstances. The term “compliance framework” is used to refer to a financial reporting framework that requires compliance with the requirements of the framework, but does not contain the acknowledgements in (a) or (b) above. Application controls in information technology* Manual or automated procedures that typically operate at a business process level. Application controls can be preventative or detective in nature and are designed to ensure the integrity of the accounting records. Accordingly, application controls relate to procedures used to initiate, record, process and report transactions or other financial data. Applied criteria (in the context of ISA 810)* The criteria applied by management in the preparation of the summary financial statements.



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Appropriateness (of audit evidence)* The measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is based. Archived files An archive is a collection of records, and the location in which the collection is kept. Archives contain records which have accumulated over the course of time. The archives of an organisation tend to contain administrative files, business records, memos, official correspondence and meeting minutes. In general, archives consist of records which have been selected for permanent or long-term preservation, Arm’s length transaction* A transaction conducted on such terms and conditions as between a willing buyer and a willing seller who are unrelated and are acting independently of each other and pursuing their own best interests. Arrestment An arrestment is a notice which prohibits a debtor from handing over to his creditor money or property until a debt due by that creditor to a third party, the arrester, is paid or secured. Assertions* Representations by management, explicit or otherwise, that are embodied in the financial statements, as used by the auditor to consider the different types of potential misstatements that may occur. Assertions (and the ‘assertion level’, i.e. the assertion for which audit procedures are used) used by the auditor fall into the following categories: (a) Assertions about classes of transactions and events for the period under audit: (i) Occurrence—transactions and events that have been recorded have occurred and pertain to the entity. (ii) Completeness—all transactions and events that should have been recorded have been recorded. (iii) Accuracy—amounts and other data relating to recorded transactions and events have been recorded appropriately. (iv) Cut-off—transactions and events have been recorded in the correct accounting period. (v) Classification—transactions and events have been recorded in the proper accounts. (b) Assertions about account balances at the period end: (i) Existence—assets, liabilities, and equity interests exist. (ii) Rights and obligations—the entity holds or controls the rights to assets, and liabilities are the obligations of the entity. (iii) Completeness—all assets, liabilities and equity interests that should have been recorded have been recorded. (iv) Valuation and allocation—assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.

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(c) Assertions about presentation and disclosure: (i) Occurrence and rights and obligations—disclosed events, transactions, and other matters have occurred and pertain to the entity. (ii) Completeness—all disclosures that should have been included in the financial statements have been included. (iii) Classification and understandability—financial information is appropriately presented and described, and disclosures are clearly expressed. (iv) Accuracy and valuation—financial and other information are disclosed fairly and at appropriate amounts. Assess* Analyse identified risks of to conclude on their significance. “Assess,” by convention, is used only in relation to risk. (also see Evaluate) Association* (see Auditor association with financial information) Assurance* (see Reasonable assurance – on this screen) Attributes sampling Attribute sampling provides results based on two possible values (i.e. correct, not correct).

Audit committee An audit committee is a committee consisting primarily of non-executive directors which is able to view a company’s affairs in a detached and independent way and liaise effectively between the main (executive) board of directors and the external and internal auditors. Assurance engagement* An engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria. The outcome of the evaluation or measurement of a subject matter is the information that results from applying the criteria. Under the “International Framework for Assurance Engagements” there are two types of assurance engagement a practitioner is permitted to perform: a reasonable assurance engagement and a limited assurance engagement. Reasonable assurance engagement The objective of a reasonable assurance engagement is a reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as the basis for a positive form of expression of the practitioner’s conclusion. Limited assurance engagement The objective of a limited assurance engagement is a reduction in assurance 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, as the basis for a negative form of expression of the practitioner’s conclusion.



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Assurance engagement risk* The risk that the practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated. Audit documentation* The record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached (terms such as “working papers” or “work-papers” are also sometimes used). Audit evidence* Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial statements and other information. (See Sufficiency of audit evidence* and Appropriateness of audit evidence*.) Audit file* One or more folders or other storage media, in physical or electronic form, containing the records that comprise the audit documentation for a specific engagement. Audit firm* (see Firm*) Audit opinion* (see Modified opinion* and Unmodified opinion*) Audit procedures Audit procedures are methods, steps, acts or tasks used by the auditor to gather evidence about the subject matter. Audit risk* The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk. Audit risk has three components: inherent risk, control risk and detection risk. See also: Risk of material misstatement. Audit sampling (sampling)* The application of audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population. Audited financial statements* (in the context of ISA 810) Financial statements audited by the auditor in accordance with ISAs, and from which the summary financial statements are derived.



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Auditor “Auditor” is used to refer to the person or persons conducting the audit, usually the engagement partner or other members of the engagement team, or, as applicable, the firm. Where an ISA expressly intends that a requirement or responsibility be fulfilled by the engagement partner, the term “engagement partner” rather than “auditor” is used. “Engagement partner” and “firm” are to be read as referring to their public sector equivalents where relevant.  

   

Continuing auditor – The auditor who performed the audit and reported on the prior period’s financial statements and continues as the auditor for the current period. Engagement auditor - The partner or other person in the firm who is responsible for the engagement and its performance, and for the report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body. (Often referred to as the ‘Principal auditor’.) External auditor – Referred to in the Internal Auditing Standards as the independent auditor the external auditor is defined in the first paragraph above. Existing audit – The auditor who is currently holding an audit or assurance services appointment with the entity (client). Incoming auditor – The incoming auditor is the current period’s auditor who did not audit the prior period’s financial statements. Internal auditor - Those individuals who perform the activities of the internal audit function. Internal auditors may belong to an internal audit department or equivalent function.

Auditor association with financial information* An auditor is associated with financial information when the auditor attaches a report to that information or consents to the use of the auditor’s name in a professional connection. Auditor’s expert* An individual or organisation possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. An auditor’s expert may be either an auditor’s internal expert (who is a partner or staff, including temporary staff, of the auditor’s firm or a network firm), or an auditor’s external expert. Auditor’s opinion The auditor’s report contains a clear written expression of opinion (‘what seems to be probably true’) on the financial statements as a whole. 

Adverse opinion - An adverse opinion should be expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements. Disclaimer of opinion - A disclaimer of opinion should be expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion on the financial statements.

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Qualified opinion - A qualified opinion should be expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with management, or limitation on scope is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion. A qualified opinion should be expressed as being ‘except for’ the effects of the matter to which the qualification relates. 

Unqualified opinion – The opinion expressed by the auditor when he or she concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

Auditor’s point estimate or auditor’s range* The amount, or range of amounts, respectively, derived from audit evidence for use in evaluating management’s point estimate. Auditor’s procedures Procedures used by the auditor to gather evidence about the subject matter. Auditor’s range* (see Auditor’s point estimate* - on this screen)



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Balance sheet A balance sheet (or statement of financial position) is a summary of a company’s balances. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a snapshot of a company's financial condition.[ Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time. Bank transfer schedule A bank transfer schedule shows the dates of all transfers of cash among the client’s various bank accounts. The schedule is prepared by using bank statements for the periods before and after year-end and by using the client’s cash receipts and payments cash books. Best-estimate assumption A best-estimate assumption is an assumption about future events which management expects to take place and actions management expects to take as of the date the information is prepared. This should be compared with hypothetical assumption. Block sampling Block sampling is a method in which a number of adjacent transactions or items will be selected, e.g. all sales invoices in a particular week, or all debtors with a name beginning with a particular letter. Business risk* A risk resulting from significant conditions, events, circumstances, actions or inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies, or from the setting of inappropriate objectives and strategies.



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Carrying value Is the value of an asset or liability in a company’s books or balance sheet. Casual vacancy Is an unforeseen vacancy Check-point restart Check-point restart is a facility offered by some database management systems (DBMSs) and backuprestore software. Check-points are taken in anticipation of the potential need to restart a software process. Many ordinary batch processes on impersonal computers are time-consuming, as are backup and restore operations. They consist of many units of work. If check-pointing is enabled, checkpoints are initiated at specified intervals, in terms of units of work or of processing time. At each checkpoint the process's progress is saved to back-up storage. The contents of the program's memory area may also be saved. The purpose of check-pointing is to minimise the amount of time and effort wasted when a long software process is interrupted by a hardware failure, a software failure, or resource unavailability. With check-pointing, the process can be restarted from the latest checkpoint rather than from the beginning. Compare To set one group of figures with another set so as to ascertain how far they agree or disagree, such as to compare the beginning balances with last year’s audited figures. Comparative financial statements* Comparative information where amounts and other disclosures for the prior period are included for comparison with the financial statements of the current period but, if audited, are referred to in the auditor’s opinion. The level of information included in those comparative financial statements is comparable with that of the financial statements of the current period. Comparative information* The amounts and disclosures included in the financial statements in respect of one or more prior periods in accordance with the applicable financial reporting framework. Compare To set one group of figures with another set so as to ascertain how far they agree or disagree, such as to compare the beginning balances with last year’s audited figures. Compensating cash balance A compensating cash balance is an account with a bank in which a company has agreed to maintain a specified minimum amount; compensating balances are typically required under the terms of bank loan agreements. Such restrictions on cash, when material, should be disclosed in financial statements. Compliance Agreement with, such as agreement that there has been correct application of International Financial Reporting Standards.



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Compilation engagement* An engagement in which accounting expertise, as opposed to auditing expertise, is used to collect, classify and summarise financial information. Complementary user entity controls* Controls that the service organisation assumes, in the design of its service, will be implemented by user entities, and which, if necessary to achieve control objectives, are identified in the description of its system. Compliance framework* (see Applicable financial reporting framework and General purpose framework) Component* An entity or business activity for which group or component management prepares financial information that should be included in the group financial statements. Component auditor* An auditor who, at the request of the group engagement team, performs work on financial information related to a component for the group audit. Component management* Management responsible for the preparation of the financial information of a component. Component materiality* The materiality for a component determined by the group engagement team. Computer-assisted audit techniques* Applications of auditing procedures using the computer as an audit tool (also known as CAATs). Consignment inventory Consignment inventory is stock legally owned by one party, but held by another. Ownership of consignment inventory is passed only when the stock is used (issued). Unused inventory in a warehouse may be returned to the manufacturer. Conclusion To form a final judgement concerning the subject matter. Confidence A firm trust or belief in the outcome. Confidentiality A professional accountant should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships should not be used for the personal advantage of the professional accountant or third parties.



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Control activities* Those policies and procedures that help ensure that management directives are carried out. Control activities are a component of internal control. Control environment* Includes the governance and management functions and the attitudes, awareness and actions of those charged with governance and management concerning the entity’s internal control and its importance in the entity. The control environment is a component of internal control. Control risk* (see Risk of material misstatement*) Corporate governance* (see Governance*) Corresponding figures* Comparative information where amounts and other disclosures for the prior period are included as an integral part of the current period financial statements, and are intended to be read only in relation to the amounts and other disclosures relating to the current period (referred to as “current period figures”). The level of detail presented in the corresponding amounts and disclosures is dictated primarily by its relevance to the current period figures. Count To sum the value of (volume, monetary value, etc), such as reckoning the value of cash, inventory, etc. ‘Creeping materiality’ Misrepresentations or omissions which may not be material in isolation but may be cumulatively. Credibility Credibility relates to the amount of confidence placed on the information or the ability of the person producing it. It has two key components: trustworthiness and expertise. Trustworthiness is based more on subjective factors (honesty, diligence, etc.), but can include objective measurements such as proven ability and reliability. Expertise can be similarly subjectively perceived, but also includes relatively objective characteristics such as credentials, certification or information quality. Criteria* The benchmarks used to evaluate or measure the subject matter including, where relevant, benchmarks for presentation and disclosure. Criteria can be formal or less formal. There can be different criteria for the same subject matter. Suitable criteria are required for reasonably consistent evaluation or measurement of a subject matter within the context of professional judgment. (Criteria, for example, could include International Financial Reporting Standards.)

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Suitable criteria* Exhibit the following characteristics: (a) Relevance: relevant criteria contribute to conclusions that assist decision-making by the intended users. (b) Completeness: criteria are sufficiently complete when relevant factors that could affect the conclusions in the context of the engagement circumstances are not omitted. Complete criteria include, where relevant, benchmarks for presentation and disclosure. (c) Reliability: reliable criteria allow reasonably consistent evaluation or measurement of the subject matter including, where relevant, presentation and disclosure, when used in similar circumstances by similarly qualified practitioners. (d) Neutrality: neutral criteria contribute to conclusions that are free from bias. (e) Understandability: understandable criteria contribute to conclusions that are clear, comprehensive, not subject to significantly different interpretations.



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Data analytics Data analytics relates to data analysis. Data analysis is a process of gathering, modelling, and transforming data with the goal of highlighting useful information, suggesting conclusions, and supporting decision making. Date of approval of the financial statements* The date on which all the statements that comprise the financial statements, including the related notes, have been prepared and those with the recognised authority have asserted that they have taken responsibility for those financial statements. Date of report (in relation to quality control)* The date selected by the practitioner to date the report. Date of the auditor’s report* The date the auditor dates the report on the financial statements in accordance with ISA 700. Date of the financial statements* The date of the end of the latest period covered by the financial statements. Date the financial statements are issued* The date that the auditor’s report and audited financial statements are made available to third parties. Deficiency in internal control* This exists when: (a) A control is designed, implemented or operated in such a way that it is unable to prevent, or detect and correct, misstatements in the financial statements on a timely basis; or (b) A control necessary to prevent, or detect and correct, misstatements in the financial statements on a timely basis is missing. Detection risk* The risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements. Disclaimer of opinion A disclaimer of opinion is expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion on the financial statements. Disclosure A release by the company of information, positive or negative, that might bear on a company’s existing position or performance. For example, the annual Financial Statements issued by a company constitute disclosures. In general there is a requirement to disclose all material facts relevant to the aspect reported on.



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Elective resolution (UK) Companies Act, 1989 introduced for private companies the right to dispense with certain formalities, such as to dispense with the requirement to appoint auditors annually. An elective resolution can be revoked by ordinary resolution, and ceases to have effect if the company is re-registered as a plc. Element* (see Element of a financial statement – on this screen*) Element of a financial statement* (in the context of ISA 805) An element, account or item of a financial statement. Emphasis of Matter paragraph* A paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements. Engagement documentation* The record of work performed, results obtained, and conclusions the practitioner reached (terms such as “working papers” or “work-papers” are sometimes used). Engagement letter* Written terms of an engagement in the form of a letter. Engagement partner* The partner or other person in the firm who is responsible for the engagement and its performance, and for the report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body. Engagement quality control review* A process designed to provide an objective evaluation, on or before the date of the report, of the significant judgments the engagement team made and the conclusions it reached in formulating the report. The engagement quality control review process is for audits of financial statements of listed entities and those other engagements, if any, for which the firm has determined an engagement quality control review is required. Engagement quality control reviewer* A partner, other person in the firm, suitably qualified external person, or a team made up of such individuals, none of whom is part of the engagement team, with sufficient and appropriate experience and authority to objectively evaluate the significant judgments the engagement team made and the conclusions it reached in formulating the report. Engagement team* All partners and staff performing the engagement, and any individuals engaged by the firm or a network firm who perform procedures on the engagement. This excludes external experts engaged by the firm or a network firm.



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Entity Something that exists independently. (Note ISAs refer to the engagement client as entity.) Entity’s risk assessment process* A component of internal control that is the entity’s process for identifying business risks relevant to financial reporting objectives and deciding about actions to address those risks, and the results thereof. Environmental matters* (a) Initiatives to prevent, abate, or remedy damage to the environment, or to deal with conservation of renewable and non-renewable resources (such initiatives may be required by environmental laws and regulations or by contract, or they may be undertaken voluntarily); (b) Consequences of violating environmental laws and regulations; (c) Consequences of environmental damage done to others or to natural resources; and (d) Consequences of vicarious liability imposed by law (for example, liability for damages caused by previous owners). Environmental performance report* A report, separate from the financial statements, in which an entity provides third parties with qualitative information on the entity’s commitments towards the environmental aspects of the business, its policies and targets in that field, its achievement in managing the relationship between its business processes and environmental risk, and quantitative information on its environmental performance. Environmental risk* In certain circumstances, factors relevant to the assessment of inherent risk for the development of the overall audit plan may include the risk of material misstatement of the financial statements due to environmental matters. Error* An unintentional misstatement in financial statements, including the omission of an amount or a disclosure. Estimation uncertainty* The susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement. Evaluate* Identify and analyse the relevant issues, including performing further procedures as necessary, to come to a specific conclusion on a matter. “Evaluation,” by convention, is used only in relation to a range of matters, including evidence, the results of procedures and the effectiveness of management’s response to a risk. (also see Assess*) Examine To enquire into evidence, such as to enquire into authoritative documents. Exception* A response that indicates a difference between information requested to be confirmed, or contained in the entity’s records, and information provided by the confirming party.



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Experienced auditor* An individual (whether internal or external to the firm) who has practical audit experience, and a reasonable understanding of: (a) (b) (c) (d)

Audit processes; ISAs and applicable legal and regulatory requirements; The business environment in which the entity operates; and Auditing and financial reporting issues relevant to the entity’s industry.

Expert* (see Auditor’s expert* and Management’s expert*.) Expertise* Skills, knowledge and experience in a particular field. External confirmation* Audit evidence obtained as a direct written response to the auditor from a third party (the confirming party), in paper form, or by electronic or other medium.



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Fair presentation framework* (see Applicable financial reporting framework and General purpose framework) Financial statements* A structured representation of historical financial information, including related notes, intended to communicate an entity’s economic resources or obligations at a point in time or the changes therein for a period of time in accordance with a financial reporting framework. The related notes ordinarily comprise a summary of significant accounting policies and other explanatory information. The term “financial statements” ordinarily refers to a complete set of financial statements as determined by the requirements of the applicable financial reporting framework, but it can also refer to a single financial statement. (Note: ‘Financial statement’ usually consist of the balance sheets, income statements [or profit and loss accounts], statements of changes in financial position [which may be presented in a variety of ways, for example, as a statement of cash flows), notes and other statements and explanatory material which are identified as being part of the financial statement.) Final audit The final audit is the main period of audit testing, when work is focused on the final financial statements. This should be compared with interim audit. Firm* A sole practitioner, partnership or corporation or other entity of professional accountants. Foot Add figures, such as to add the figures in a column of monetary values. Forecast* Prospective financial information prepared on the basis of assumptions as to future events which management expects to take place and the actions management expects to take as of the date the information is prepared (best-estimate assumptions). Fraud* An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. Fraud risk factors* Events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Fraudulent financial reporting* Involves intentional misstatements, including omissions of amounts or disclosures in financial statements, to deceive financial statement users.



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GAAP Generally Accepted Accounting Principles (GAAP) is the term used to refer to the standard framework of guidelines for financial accounting used in any given jurisdiction. GAAP includes the standards, conventions, and rules accountants follow in recording and summarising transactions, and in the preparation of financial statements. Many countries use or are converging on the International Financial Reporting Standards (IFRS), established and maintained by the International Accounting Standards Board. Garnishee order A garnishee order is a notice to a person or organisation to retain custody of assets in his control that are owed to or belong to another person. The garnishee (possibly a bank) merely holds the assets until legal proceedings determine who is entitled to the property. General IT-controls* Policies and procedures that relate to many applications and support the effective functioning of application controls by helping to ensure the continued proper operation of information systems. General IT-controls commonly include controls over data centre and network operations; system software acquisition, change and maintenance; access security; and application system acquisition, development, and maintenance. General purpose financial statements* Financial statements prepared in accordance with a general purpose framework. General purpose framework* A financial reporting framework designed to meet the common financial information needs of a wide range of users. The financial reporting framework may be a fair presentation framework or a compliance framework. The term “fair presentation framework” is used to refer to a financial reporting framework that requires compliance with the requirements of the framework and: (a) Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be necessary for management to provide disclosures beyond those specifically required by the framework; or (b) Acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial statements. Such departures are expected to be necessary only in extremely rare circumstances. The term “compliance framework” is used to refer to a financial reporting framework that requires compliance with the requirements of the framework, but does not contain the acknowledgements in (a) or (b) above. Governance* Describes the role of person(s) or organisation(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity.



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Grandfather-father-son data cycling This procedure refers to at least three generations of backup master files. thus, the most recent backup is the son, the oldest backup is the grandfather. It's commonly used for a batch transaction processing system with a magnetic tape. If the system fails during a batch run, the master file is recreated by using the son backup and then restarting the batch. However if the son backup fails, is corrupted or destroyed, then the next generation up backup (father) is required. Likewise, if that fails, then the next generation up backup (grandfather) is required. Of course the older the generation, the more the data may be out of date. Organisations can have up to twenty generations of backup. Group* All the components whose financial information is included in the group financial statements. A group always has more than one component. Group audit* The audit of group financial statements. Group audit opinion* The audit opinion on the group financial statements. Group engagement partner* The partner or other person in the firm who is responsible for the group audit engagement and its performance, and for the auditor’s report on the group financial statements that is issued on behalf of the firm. Where joint auditors conduct the group audit, the joint engagement partners and their engagement teams collectively constitute the group engagement partner and the group engagement team. Group engagement team* Partners, including the group engagement partner, and staff who establish the overall group audit strategy, communicate with component auditors, perform work on the consolidation process, and evaluate the conclusions drawn from the audit evidence as the basis for forming an opinion on the group financial statements. Group financial statements* Financial statements that include the financial information of more than one component. The term “group financial statements” also refers to combined financial statements aggregating the financial information prepared by components that have no parent but are under common control. Group management* Management responsible for the preparation of the group financial statements. Group-wide controls* Controls designed, implemented and maintained by group management over group financial reporting.



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Haphazard selection This is a selection process used in sampling in which the auditor attempts to give all items in a population a chance of being selected by choosing items in a haphazard way. Historical financial information* Information expressed in financial terms in relation to a particular entity, derived primarily from that entity’s accounting system, about economic events occurring in past time periods or about economic conditions or circumstances at points in time in the past. Hypothetical assumption A hypothetical assumption is a projection which is based partly or wholly on assumptions about future events and management actions which are not necessarily expected to take place, and may typically include entities that are in a start-up phase or are considering a major change in the nature of operations. This should be compared with best-estimate assumption.



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IFAC The International Federation of Accountants - an organisation of national accounting associations and other groups interested in accounting matters. IFRS International Financial Reporting Standards issued by the International Accounting Standards Board (IASB). Imprest system The Imprest system is a form of financial accounting system. The most common imprest system is the petty cash system. The basis of an imprest system is that a fixed amount is issued to a fund-holder (as a debt) which is replenished at the end of a period in return for documentation of payments (vouchers, etc.) made during the period, or when the circumstances request it. This replenishment is paid from a central cash account. Inconsistency* Other information that contradicts information contained in the audited financial statements. A material inconsistency may raise doubt about the audit conclusions drawn from audit evidence previously obtained and, possibly, about the basis for the auditor’s opinion on the financial statements. Incremental backup An incremental backup is a computer data backup method where multiple backups are kept (not just the last one). These backups will be incremental if each original piece of backed up information is stored only once, and then successive backups only contain the information that changed since a previous backup. As a backup method, it is highly efficient. Independence* Comprises: (a) Independence of mind The state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional skepticism. (b) Independence in appearance The avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including any safeguards applied, would reasonably conclude a firm’s, or a member of the assurance team’s, integrity, objectivity or professional skepticism had been compromised. Information system relevant to financial reporting* A component of internal control that includes the financial reporting system, and consists of the procedures and records established to initiate, record, process and report entity transactions (as well as events and conditions) and to maintain accountability for the related assets, liabilities and equity.



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Inherent risk* (see Risk of material misstatement*) Initial audit engagement* An engagement in which either: (a) The financial statements for the prior period were not audited; or (b) The financial statements for the prior period were audited by a predecessor auditor. Inquiry*(Enquiry) Enquiry consists of seeking information of knowledgeable persons, both financial and non-financial, within the entity or outside the entity. Inspection (as an audit procedure)* Examining records or documents, whether internal or external, in paper form, electronic form, or other media, or a physical examination of an asset. Inspection (in relation to quality control)* In relation to completed engagements, procedures designed to provide evidence of compliance by engagement teams with the firm’s quality control policies and procedures. Integrity The principle of integrity imposes an obligation on all professional accountants to be straightforward and honest in professional and business relationships. Integrity also implies fair dealing and truthfulness. Intended users* The person, persons or class of persons for whom the practitioner prepares the assurance report. The responsible party can be one of the intended users, but not the only one. Interim audit An interim audit is undertaken prior to the final audit, often during the period under review. The auditor is likely to carry out tests of control at interim audits. This should be compared with the final audit. Interim financial information or statements* Financial information (which may be less than a complete set of financial statements as defined above) issued at interim dates (usually half-yearly or quarterly) in respect of a financial period. Internal audit: ‘Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes’ (The Institute of Internal Auditors). Internal audit function* An appraisal activity established or provided as a service to the entity. Its functions include, amongst other things, examining, evaluating and monitoring the adequacy and effectiveness of internal control.



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Internal auditors* Those individuals who perform the activities of the internal audit function. Internal auditors may belong to an internal audit department or equivalent function. Internal control* The process designed, implemented and maintained by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of an entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations. The term “controls” refers to any aspects of one or more of the components of internal control. International Financial Reporting Standards* The International Financial Reporting Standards issued by the International Accounting Standards Board. Investigate* Enquire into matters arising from other procedures to resolve them. IT environment* The policies and procedures that the entity implements and the IT infrastructure (hardware, operating systems, etc.) and application software that it uses to support business operations and achieve business strategies.



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Joint venture A joint venture (often abbreviated JV) is an entity formed between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing equity, and they then share in the revenues, expenses, and control of the enterprise. The venture can be for one specific project only, or a continuing business relationship. Judgemental sampling This is a selection process used in sampling in which the auditor attempts to give all items in a population a chance of being selected by choosing items according to judgement. Jurisdiction Jurisdiction is the practical authority granted to a formally constituted legal body to deal with and make pronouncements on legal matters and, by implication, to administer justice within a defined area of responsibility.



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Kiting Kiting is a form of fraud that overstates cash by causing it to be simultaneously included in two or more bank accounts.



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Limitation on scope A limitation on the scope of the auditor’s work may sometimes be imposed by the client, usually the management (e.g. when the terms of the engagement specify that the auditor will not carry out the audit procedure that the auditor considers is necessary). A scope limitation may be imposed by circumstances (e.g. the timing of the auditor’s appointment is such that the auditor is too late [unable] to observe the counting of inventories). It may also arise when, in the opinion of the auditor, the client’s accounting records are inadequate or when the auditor is unable to carry out an audit procedure considered necessary. Limited assurance engagement* (see Assurance engagement*) Listed entity* An entity whose shares, stock or debt are quoted or listed on a recognised stock exchange, or are marketed under the regulations of a recognised stock exchange or other equivalent body.



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Management* The person(s) with executive responsibility for the conduct of the entity’s operations. For some entities in some jurisdictions, management includes some or all of those charged with governance, for example, executive members of a governance board, or an owner-manager. Management bias* A lack of neutrality by management in the preparation of information. Management letter The management letter is the means by which the auditor communicates to management any weaknesses discovered in the system of internal control, and is usually sent at the end of both the interim and final audits. Management’s expert* An individual or organisation possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial statements. Management’s point estimate* The amount selected by management for recognition or disclosure in the financial statements as an accounting estimate. Material misstatement A significant mistake found in financial information which could arise from errors and fraud and which could influence the economic decisions of users taken on the basis of the financial statements. Mind-set In decision theory and general systems theory, a mindset is a set of assumptions or methods held by one or more people or groups of people which is so established that it creates a powerful incentive within these people or groups to continue to adopt or accept prior behaviors, choices, or tools. Misappropriation of assets* Involves the theft of an entity’s assets and is often perpetrated by employees in relatively small and immaterial amounts. However, it can also involve management who are usually more capable of disguising or concealing misappropriations in ways that are difficult to detect. Misstatement* A difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud. Where the auditor expresses an opinion on whether the financial statements are presented fairly, in all material respects, or give a true and fair view, misstatements also include those adjustments of amounts, classifications, presentation, or disclosures that, in the auditor’s judgment, are necessary for the financial statements to be presented fairly, in all material respects, or to give a true and fair view. Misstatement of fact* Other information that is unrelated to matters appearing in the audited financial statements that is incorrectly stated or presented. A material misstatement of fact may undermine the credibility of the document containing audited financial statements.



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Moderate level of assertion A moderate level of assertion is an assertion in which the professional accountant states, based on the examination of the evidence supporting the assumptions, anything has come to his or her attention which causes him or her to believe that the assumptions do not provide a reasonable basis for the prospective financial information. It represents limited assurance. Modified opinion* Is a qualified opinion, an adverse opinion or a disclaimer of opinion. Monitoring (in relation to quality control)* A process comprising an ongoing consideration and evaluation of the firm’s system of quality control, including a periodic inspection of a selection of completed engagements, designed to provide the firm with reasonable assurance that its system of quality control is operating effectively. Monitoring of controls* A process to assess the effectiveness of internal control performance over time. It includes assessing the design and operation of controls on a timely basis and taking necessary corrective actions modified for changes in conditions. Monitoring of controls is a component of internal control.



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Negative assurance Negative assurance is when an auditor gives an assurance that nothing has come to his attention which indicates that the financial statements have not been prepared according to the framework. In other words, he or she gives their assurance in the absence of any evidence to the contrary. Negative confirmation request* A request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request. Network* A larger structure: (a) That is aimed at cooperation, and (b) That is clearly aimed at profit or cost-sharing or shares common ownership, control or management, common quality control policies and procedures, common business strategy, the use of a common brand name, or a significant part of professional resources. Network firm* A firm or entity that belongs to a network. Non-compliance (in the context of ISA 250)* Acts of omission or commission by the entity, either intentional or unintentional, which are contrary to the prevailing laws or regulations. Such acts include transactions entered into by, or in the name of, the entity, or on its behalf, by those charged with governance, management or employees. Non-compliance does not include personal misconduct (unrelated to the business activities of the entity) by those charged with governance, management or employees of the entity. Non-response* A failure of the confirming party to respond, or fully respond, to a positive confirmation request, or a confirmation request returned undelivered. Non-sampling risk* The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk.



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Objectivity A professional accountant should not allow bias, conflict of interest or undue influence of others to override professional or business judgments. Observation* Consists of looking at a process or procedure being performed by others, for example, the auditor’s observation of inventory counting by the entity’s personnel, or of the performance of control activities. Opening balances* Those account balances that exist at the beginning of the period. Opening balances are based upon the closing balances of the prior period and reflect the effects of transactions and events of prior periods and accounting policies applied in the prior period. Opening balances also include matters requiring disclosure that existed at the beginning of the period, such as contingencies and commitments. Other information* Financial and non-financial information (other than the financial statements and the auditor’s report thereon) which is included, either by law, regulation, or custom, in a document containing audited financial statements and the auditor’s report thereon. Other Matter paragraph* A paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report. Outcome of an accounting estimate* The actual monetary amount which results from the resolution of the underlying transaction(s), event(s) or condition(s) addressed by the accounting estimate. Overall audit strategy* Sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan.



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Partner* Any individual with authority to bind the firm with respect to the performance of a professional services engagement. Peer review Peer review is a process of self-regulation by a profession involving qualified individuals within the relevant field, such as qualified auditors reviewing the work of other auditors. Peer review methods are employed to maintain standards, improve performance and provide credibility. Performance materiality* The amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. If applicable, performance materiality also refers to the amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions, account balances or disclosures. Perpetual inventory In business and accounting/accountancy, perpetual inventory (or continuous inventory) describes systems of inventory where information on inventory quantity and availability is updated on a continuous basis as a function of doing business. Generally this is accomplished by connecting the inventory system with order entry and in retail the point of sale system. Personnel* Partners and staff. Persuasive Having the power or ability to persuade or convince. Pervasive* A term used, in the context of misstatements, to describe the effects on the financial statements of misstatements or the possible effects on the financial statements of misstatements, if any, that are undetected due to an inability to obtain sufficient appropriate audit evidence. Pervasive effects on the financial statements are those that, in the auditor’s judgment: (a) Are not confined to specific elements, accounts or items of the financial statements; (b) If so confined, represent or could represent a substantial proportion of the financial statements; or (c) In relation to disclosures, are fundamental to users’ understanding of the financial statements. Population* The entire set of data from which a sample is selected and about which the auditor wishes to draw conclusions. Positive confirmation request* A request that the confirming party respond directly to the auditor indicating whether the confirming party agrees or disagrees with the information in the request, or providing the requested information. Practitioner* A professional accountant in public practice.



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Preconditions for an audit* The use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management and, where appropriate, those charged with governance to the premise on which an audit is conducted. Predecessor auditor* The auditor from a different audit firm, who audited the financial statements of an entity in the prior period and who has been replaced by the current auditor. Premise, relating to the responsibilities of management and, where appropriate, those charged with governance, on which an audit is conducted* That management and, where appropriate, those charged with governance have acknowledged and understand that they have the following responsibilities that are fundamental to the conduct of an audit in accordance with ISAs. That is, responsibility: (a) For the preparation of the financial statements in accordance with the applicable financial reporting framework, including where relevant their fair presentation; (b) For such internal control as management and, where appropriate, those charged with governance determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; and (c) To provide the auditor with: (i)

Access to all information of which management and, where appropriate, those charged with governance are aware that is relevant to the preparation of the financial statements such as records, documentation and other matters; (ii) Additional information that the auditor may request from management and, where appropriate, those charged with governance for the purpose of the audit; and (iii) Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.

In the case of a fair presentation framework, (a) above may be restated as “for the preparation and fair presentation of the financial statements in accordance with the financial reporting framework,” or “for the preparation of financial statements that give a true and fair view in accordance with the financial reporting framework.” The “premise, relating to the responsibilities of management and, where appropriate, those charged with governance, on which an audit is conducted” may also be referred to as the “premise.” Principal A principal is a person or entity who authorises an agent to act. Principal-agency problem The principal-agent problem (or agency dilemma) concerns the difficulties that arise when a principal hires an agent, in a situation where the two may not have the same interests, and where the principal is, presumably, hiring the agent to pursue the interests of the former. Principal-agency Theory Principal -agency relationships occur when one party, the principal, employs another, the agent, to perform a task on their behalf. Professional accountant* An individual who is a member of an IFAC member body. ©Tony Surridge Online Limited, 2013


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Professional accountant in public practice* A professional accountant, irrespective of functional classification (for example, audit, tax or consulting) in a firm that provides professional services. This term is also used to refer to a firm of professional accountants in public practice. Professional Behaviour A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession. Professional Competence and Due Care A professional accountant has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. A professional accountant should act diligently and in accordance with applicable technical and professional standards when providing professional services. Professional judgment* The application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement. Professional skepticism* An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of evidence. Professional standards* International Standards on Auditing (ISAs) and relevant ethical requirements. Professional standards (in the context of ISQC 1). IAASB Engagement Standards, as defined in the IAASB’s Preface to the International Standards on Quality Control, Auditing, Review, Other Assurance and Related Services, and relevant ethical requirements. Projection* Prospective financial information prepared on the basis of: (a) Hypothetical assumptions about future events and management actions which are not necessarily expected to take place, such as when some entities are in a start-up phase or are considering a major change in the nature of operations; or (b) A mixture of best-estimate and hypothetical assumptions. Prospective financial information* Financial information based on assumptions about events that may occur in the future and possible actions by an entity. Prospective financial information can be in the form of a forecast, a projection or a combination of both. (see Forecast* and Projection – on this screen*)



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Prove To test the genuineness of, such as to re-calculate totals to ascertain their correctness. Public sector* National governments, regional (for example, state, provincial, territorial) governments, local (for example, city, town) governments and related governmental entities (for example, agencies, boards, commissions and enterprises).



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Qualified opinion A qualified opinion is expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with management, or limitation of scope, is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion.



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Random selection Simple random selection is a method of selection used in sampling in which every item in a population has the same statistical probability of being selected as every other item.

Read To interpret facts, such as to read minutes of directors’ meetings, etc. Reasonable assurance (in the context of assurance engagements, including audit engagements, and quality control)* A high, but not absolute, level of assurance. (Note: assurance is ‘confidence’) Reasonable assurance engagement* (see Assurance engagement*) Recalculation* Consists of checking the mathematical accuracy of documents or records. Reconcile To prove consistency, such as to test that cash balances, or accounts receivables balances are consistent with the facts. Related party* A party that is either: (a) A related party as defined in the applicable financial reporting framework; or (b) Where the applicable financial reporting framework establishes minimal or no related party requirements: (i)

A person or other entity that has control or significant influence, directly or indirectly through one or more intermediaries, over the reporting entity; (ii) Another entity over which the reporting entity has control or significant influence, directly or indirectly through one or more intermediaries; or (iii) Another entity that is under common control with the reporting entity through having: a. b. c.

Common controlling ownership; Owners who are close family members; or Common key management.

However, entities that are under common control by a state (that is, a national, regional or local government) are not considered related unless they engage in significant transactions or share resources to a significant extent with one another. Related services* Comprise agreed-upon procedures and compilations.



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Relevant ethical requirements* Ethical requirements to which the engagement team and engagement quality control reviewer are subject, which ordinarily comprise Parts A and B of the International Federation of Accountants’ Code of Ethics for Professional Accountants (IFAC Code) together with national requirements that are more restrictive. Reliance approach to auditing The reliance approach is based on the convention that when control testing uncovers a strong control system (control detection risk is low) then because audit risk is low, substantive testing can be reduced. Re-performance* The auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal controls. Report on the description and design of controls at a service organisation (referred to in ISA 402 as a type 1 report)* A report that comprises: (a) A description, prepared by management of the service organisation, of the service organisation’s system, control objectives and related controls that have been designed and implemented as at a specified date; and (b) A report by the service auditor with the objective of conveying reasonable assurance that includes the service auditor’s opinion on the description of the service organisation’s system, control objectives and related controls and the suitability of the design of the controls to achieve the specified control objectives. Report on the description, design, and operating effectiveness of controls at a service organisation (referred to in ISA 402 as a type 2 report)* A report that comprises: (a) A description, prepared by management of the service organisation, of the service organisation’s system, control objectives and related controls, their design and implementation as at a specified date or throughout a specified period and, in some cases, their operating effectiveness throughout a specified period; and (b) A report by the service auditor with the objective of conveying reasonable assurance that includes: (i)

The service auditor’s opinion on the description of the service organisation’s system, control objectives and related controls, the suitability of the design of the controls to achieve the specified control objectives, and the operating effectiveness of the controls; and

(ii) A description of the service auditor’s tests of the controls and the results thereof. Representation A presentation of facts, view or argument. For example a company’s financial statements , which are the responsibility of the company’s management, would constitute management representation.



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Responsible party* The person (or persons) who: (a) In a direct reporting engagement, is responsible for the subject matter (often the client’s management); or (b) In an assertion-based engagement, is responsible for the subject matter information (the assertion), and may be responsible for the subject matter. The responsible party may or may not be the party who engages the practitioner (the engaging party). Review (in relation to evidence) An inspection of, such as the inspection of disclosures, legal documents, etc. Review (in relation to quality control)* Appraising the quality of the work performed and conclusions reached by others. Review engagement* The objective of a review engagement is to enable an auditor to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to the auditor’s attention that causes the auditor to believe that the financial statements are not prepared, in all material respects, in accordance with an applicable financial reporting framework. Review procedures* The procedures deemed necessary to meet the objective of a review engagement, primarily enquiries of entity personnel and analytical procedures applied to financial data. Risk assessment procedures* The audit procedures performed to obtain an understanding of the entity and its environment, including the entity’s internal control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels. Risk based auditing Risk based auditing is based on the theory that the assessed level of audit risk will have a direct impact on: (i) the way the audit is conducted, and (ii) what constitutes sufficient appropriate evidence. Risk of material misstatement* The risk that the financial statements are materially misstated prior to audit. This consists of two components, described as follows at the assertion level: (a) Inherent risk The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls. (b) Control risk The risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control. ©Tony Surridge Online Limited, 2013


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Sampling* (see Audit sampling*) Sampling risk* The risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure. Sampling risk can lead to two types of erroneous conclusions: (a) In the case of a test of controls, that controls are more effective than they actually are, or in the case of a test of details, that a material misstatement does not exist when in fact it does. The auditor is primarily concerned with this type of erroneous conclusion because it affects audit effectiveness and is more likely to lead to an inappropriate audit opinion. (b) In the case of a test of controls, that controls are less effective than they actually are, or in the case of a test of details, that a material misstatement exists when in fact it does not. This type of erroneous conclusion affects audit efficiency as it would usually lead to additional work to establish that initial conclusions were incorrect. Sampling unit* The individual items constituting a population. Scan To examine critically, for example to study a set of data to specifically identify unusual items. skepticism skepticism relates to the doctrine that no facts can be certainly known. A sceptic is someone who has doubts or tends to disbelieve. Scope of a review* The review procedures deemed necessary in the circumstances to achieve the objective of the review. Securities Financing or investment instruments (some negotiable, others not) bought and sold in financial markets, such as bonds, debentures, notes, options, shares (stocks), and warrants. Service auditor* An auditor who, at the request of the service organisation, provides an assurance report on the controls of a service organisation. Service organisation* A third-party organisation (or segment of a third-party organisation) that provides services to user entities that are part of those entities’ information systems relevant to financial reporting. Service organisation’s system* The policies and procedures designed, implemented and maintained by the service organisation to provide user entities with the services covered by the service auditor’s report.



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Side agreement A side agreement (or side letter) is a collective agreement that is not part of the underlying or primary collective bargaining agreement (CBA), and which the parties to the contract utilise to (i) reach agreement on issues the CBA does not cover, (ii) to clarify issues in the CBA, or (iii) to modify the CBA (permanently or temporarily). Significance* The relative importance of a matter, taken in context. The significance of a matter is judged by the practitioner in the context in which it is being considered. This might include, for example, the reasonable prospect of its changing or influencing the decisions of intended users of the practitioner’s report; or, as another example, where the context is a judgment about whether to report a matter to those charged with governance, whether the matter would be regarded as important by them in relation to their duties. Significance can be considered in the context of quantitative and qualitative factors, such as relative magnitude, the nature and effect on the subject matter and the expressed interests of intended users or recipients. Significant component* A component identified by the group engagement team (i) that is of individual financial significance to the group, or (ii) that, due to its specific nature or circumstances, is likely to include significant risks of material misstatement of the group financial statements. Significant deficiency in internal control* A deficiency or combination of deficiencies in internal control that, in the auditor’s professional judgment, is of sufficient importance to merit the attention of those charged with governance. Significant risk* An identified and assessed risk of material misstatement that, in the auditor’s judgment, requires special audit consideration. Smaller entity* An entity which typically possesses qualitative characteristics such as: (a) Concentration of ownership and management in a small number of individuals (often a single individual – either a natural person or another enterprise that owns the entity provided the owner exhibits the relevant qualitative characteristics); and (b) One or more of the following: (i) (ii) (iii) (iv) (v) (vi)

Straightforward or uncomplicated transactions; Simple record-keeping; Few lines of business and few products within business lines; Few internal controls; Few levels of management with responsibility for a broad range of controls; or Few personnel, many having a wide range of duties.

These qualitative characteristics are not exhaustive, they are not exclusive to smaller entities, and smaller entities do not necessarily display all of these characteristics.



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Special purpose financial statements* Financial statements prepared in accordance with a special purpose framework. Special purpose framework* A financial reporting framework designed to meet the financial information needs of specific users. The financial reporting framework may be a fair presentation framework or a compliance framework. Staff* Professionals, other than partners, including any experts the firm employs. Statistical sampling* An approach to sampling that has the following characteristics: (a) Random selection of the sample items; and (b) The use of probability theory to evaluate sample results, including measurement of sampling risk. A sampling approach that does not have characteristics (a) and (b) is considered non-statistical sampling. Stratification* The process of dividing a population into sub-populations, each of which is a group of sampling units which have similar characteristics (often monetary value). Subject matter In an assurance engagement (such as an audit), the subject matter is the topic about which the assurance is conducted. Subject matter could be financial statements, non-financial indicators, an internal control process or statistical information. Subject matter information* The outcome of the evaluation or measurement of a subject matter. It is the subject matter information about which the practitioner gathers sufficient appropriate evidence to provide a reasonable basis for expressing a conclusion in an assurance report. Subsequent events* Events occurring between the date of the financial statements and the date of the auditor’s report, and facts that become known to the auditor after the date of the auditor’s report. Sub-service organisation* A service organisation used by another service organisation to perform some of the services provided to user entities that are part of those user entities’ information systems relevant to financial reporting. Substantive procedure* An audit procedure designed to detect material misstatements at the assertion level. Substantive procedures comprise: (a) Tests of details (of classes of transactions, account balances, and disclosures); and (b) Substantive analytical procedures.



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Sufficiency (of audit evidence)* The measure of the quantity of audit evidence. The quantity of the audit evidence needed is affected by the auditor’s assessment of the risks of material misstatement and also by the quality of such audit evidence. Suitable criteria* (see Criteria*) Suitably qualified external person* An individual outside the firm with the competence and capabilities to act as an engagement partner, for example a partner of another firm, or an employee (with appropriate experience) of either a professional accountancy body whose members may perform audits and reviews of historical financial information, or other assurance or related services engagements, or of an organisation that provides relevant quality control services. Summary financial statements (in the context of ISA 810)* Historical financial information that is derived from financial statements but that contains less detail than the financial statements, while still providing a structured representation consistent with that provided by the financial statements of the entity’s economic resources or obligations at a point in time or the changes therein for a period of time. Different jurisdictions may use different terminology to describe such historical financial information. Supplementary information* Information that is presented together with the financial statements that is not required by the applicable financial reporting framework used to prepare the financial statements, normally presented in either supplementary schedules or as additional notes. Systematic selection The systematic selection method used in sampling where the auditor calculates a uniform sampling interval by dividing the population by the sample size.



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Teeming and lading Teeming and lading (or ‘lapping’) is an embezzlement scheme in which cash collections from customers are stolen and the shortage is concealed by delaying the recording of subsequent cash receipts. It involves the offsetting of one debtor’s cash received against another debtor’s account to cover up a misappropriation of the first debtor’s cash received. Test* The application of procedures to some or all items in a population. Tests of controls* An audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level. Those charged with governance* The person(s) or organisation(s) (for example, a corporate trustee) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting process. For some entities in some jurisdictions, those charged with governance may include management personnel, for example, executive members of a governance board of a private or public sector entity, or an owner-manager. Tolerable misstatement* A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population. Total rate of deviation* A rate of deviation from prescribed internal control procedures set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the rate of deviation set by the auditor is not exceeded by the actual rate of deviation in the population. Tracing Checking from supporting document to recorded entry. True and fair True and fair has become a term of art. It is generally understood to mean a presentation of accounts drawn up according to accepted accounting principles using accurate figures as far as possible and reasonable estimates otherwise, and arranging them so as to show within the limits of current accounting practice as objective a picture as possible free from wilful bias, distortion, manipulation or concealment of material facts.’ (Lee)



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Unadjusted error worksheet An unadjusted error worksheet is adjusting proposed entries with accompanying justifications suggested by the auditor and required by management to bring the account balance on the company financial statements in line with the audited account balance. Uncertainty* A matter whose outcome depends on future actions or events not under the direct control of the entity but that may affect the financial statements. Uncorrected misstatements* Misstatements that the auditor has accumulated during the audit and that have not been corrected. Unmodified opinion* The opinion expressed by the auditor when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. Unqualified opinion An audit opinion expressed when the auditor concludes that the financial statements give a true and fair view (or are presented fairly, in all material respects) ) in accordance with the identified financial reporting framework. User The individual or individuals who are going to use the subject matter for some advantageous purpose, for example a company’s shareholders who are going to use the company’s financial statements to make investment decisions. User auditor* An auditor who audits and reports on the financial statements of a user entity. User entity* An entity that uses a service organisation and whose financial statements are being audited.



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Variable sampling Variables sampling is concerned with sampling units which can take a value within a continuous range of possible values and is used to provide conclusions as to the monetary value of a population. It can test either whether a certain statement is true or false or give an estimate of the true value of a population. Vouching Checking from recorded entry to supporting document.



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Walk-through test* Involves tracing a few transactions through the financial reporting system. Whistleblower A whistleblower is a person who publicly alleges concealed misconduct on the part of an organisation or body of people, usually from within that same organisation. This misconduct may be classified in many ways; for example, a violation of a law, rule, regulation and/or a direct threat to public interest, such as fraud, health/safety violations, and corruption. Whistleblowers may make their allegations internally (for example, to other people within the accused organisation) or externally (to law enforcement agencies, to the media or to groups concerned with the issues). Written resolution A resolution is a written motion adopted by a deliberative body (an organisation, committee or meeting, comprising members) who use parliamentary procedure (a body of rules, ethics, and customs governing meetings) for making decisions. The substance of the resolution can be anything that can normally be proposed as a motion. For long or important motions, though, it is often better to have them written out so that discussion is easier or so that it can be distributed outside of the body after its adoption. Written representation* A written statement by management provided to the auditor to confirm certain matters or to support other audit evidence. Written representations in this context do not include financial statements, the assertions therein, or supporting books and records.



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