Chapter 1

Question 1

What is an Assurance engagement?

Answer 1

An engagement in which a practitioner aims to obtain sufficient appropriate audit evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the subject matter information

Question 2

What are the two types of assurance engagements and explain?

Answer 2

1. Reasonable assurance engagement - Results in a positive expression of opinion and where the level of assurance given is deemed to be high
2. Limited assurance engagements - Results in a negative expression of opinion and where the level of assurance is deemed to be moderate.

Question 3

What can an assurance report never do and why?

Answer 3

Provide absolute assurance. This is because of the nature of assurance available.

Question 4

What benefits does assurance services bring to the users of the accounts?

Answer 4

1. Enhance the credibility of the information being reported on.
2. It reduces the risk of management bias, error or even fraud from the information being reported on.
3. Draws the attention of the user to any deficiencies in the information being reported on.

Question 5

What benefits does assurance services bring to the wider share market?

Answer 5

1. They ensure that high quality, reliable information circulates the market.
2. They give investors added faith in the market.
3. They improve the reputation of organisations trading in the market.

Question 6

general advantage of an audit service?

Answer 6

You get an independent opinion from an external source which can build confidence.

Question 7

An auditor expresses an opinion to see if the FS give….

Answer 7

A true and fair view.

Question 8

According to ISA 200, what is the overall objective of an auditor?

Answer 8

1. To obtain reasonable assurance about whether the FS are free from material misstatement, whether due to error or fraud, thereby enabling the auditor to express the opinion on whether the financial statements are prepared, in all material respects in accordance with an applicable financial reporting framework; and
2. To report on the FS and communicate as required by the ISAs, in accordance with the auditor’s findings.

Question 9

What is the relevant criteria in which FS’s must abide to?

Answer 9

The Law, and the accounting standards.

Question 10

What must the auditor do in order to support the audit opinion?

Answer 10

The auditor must gain enough evidence in order to support the audit opinion.

Question 11

Who must be audited and what is the criteria to determine this?

Answer 11

All companies except those that are small, as per the 2006 Companies act. Companies that are subsidaries given that the conditions are met.

Question 12

what are the conditions for a company to be classified as small?

Answer 12

In order to be small, you must meet 2 of the following 3 requirements:

1. The company has no more than 50 employees
2. The company’s turnover does not exceed £10.2m
3. The company’s gross assets total does not exceed £5.1 million

Question 13

What are the conditions for a companies subsidairy not being audited?

Answer 13

The subsidairies assets must be guaranteed by the parent company.

Question 14

What must a company do if they take advantage of the audit exemption?

Answer 14

They must provide a statement to this effect in the company accounts.

Question 15

If a company is under the audit threshold, they still must perform an audit if…?

Answer 15

1. The articles of association require one
2. Shareholders who own at least 10% of the shares ask for one.
3. The company is a non-dormant public company.
4. The company is involved in the insurance or banking markets.

Question 16

What was the reason for doing away with audits of smaller companies?

Answer 16

The point was based on a point raised by the Department of Trade and Industry. They said that if an audit was to protect shareholders from who are not involved with managing the business, what is the point if in the majority of cases the small business owners are often the owners of the business, too.

Question 17

Benefits of an audit to management?

Answer 17

1. They value having their business scrutinised by another set of professional eyes.
2. It provides additional assurance to third parties (e.g. tax authorities) that the FS’s are reliable.
3. A growing business will one day require an audit.
4. It will have subsidiary benefits, such as the auditors recommending improvements in company systems.

Question 18

Drawbacks to having an audit from an entities POV?

Answer 18

1. Cost
2. Staff time taken to provide information.
3. Disruption to client business.
4. Time spent on the initial appointment process.
5. Dealing with confidentiality.
6. Expectations gap, particularly surrounding fraud detection.
7. Inherent limitations of audit.

Question 19

Major difference in different audit engagements?

Answer 19

The level of assurance given at the end. Is it a reasonable level of assurance or is it limited?

Question 20

Difference between audit engagements where high an low levels of assurance are given?

Answer 20

The amount, and type of evidence will be less for those audit engagements where there is a low level of assurance.

Question 21

What are the main audit procedures as per ISA 500?

Answer 21

1. Inspection of documentation.
2. inspection of assets.
3. Observation.
4. External confirmation.
5. Recalculation.
6. Reperformance.
7. Analytical procedures (Ratios/trends/comparitive market info)
8. Inquiry.

Question 22

What are the main audit procedures in engagements to review the financial statements (ISRE 2400)?

Answer 22

1. Inquiry. for e.g. in to the accounting principles in place, the accounting systems in use, and concerning material assertions.
2. Analytical procedures,
   - comparison with prior periods.
   - comparison with anticipated results
   - analysis of expected patterns in elements of the FS’s

Question 23

What are the main audit procedures in engagements to review prospective financial information (ISRE 3400)?

Answer 23

1. Assessment of assumptions.
2. Recomputation (of figures)
3. Written representation

Question 24

Main difference between ISRE 2400 and 3400?

Answer 24

ISRE 2400 looks at historical information that can be tested, and in some instances verified after the fact.

ISRE 3400 looks forward at prospective information which revolves around scrutinising management assumptions, and relys on written representations rather than obtaining evidence by direct testing.

Question 25

Why is evidence from a review assignment generally far less reliable?

Answer 25

As some of the most reliable sources, such as third party confirmations and evidence generated by the assurance provider are not required.

Question 26

How can the nature and quality of the evidence further be affected by the nature of the subject matter of the assignment? What procedures will you carry out?

Answer 26

For e.g., if reviewing forecast figures. You will carry out analytical procedures and inquiries. But, you will be reviewing figures for transactions and events for which some or all have not yet occurred at the point in which the opinion is given, as they are forecast figures. The information will be based on subjective estimates due to the uncertanties involved.

Question 27

what is an unqualified report?

Answer 27

An unqualified opinion is an independent auditor's judgment that a company's financial statements are fairly and appropriately presented, without any identified exceptions, and in compliance with generally accepted accounting principles (GAAP)

Question 28

What are the benefits of an audit on the FS required in order for a company to get the approval of a bank loan?

Answer 28

1. shareholders not involved in the day to day management of the company (non-exec's) will have assurance that their interests are protected (ie, company assets are not abused) 2. Financial info is likely to be more reliable, resulting in more informed decisions. 3. An audit improves a company's governance - management benefits from: - assurance that they are complying with their statutory responsibilities (including the prevention and detection of fraud, as the audit may act as a detterent); - by products of the audit, such as identification of weaknessess and recommendations for improvement; - reducing risks and improving performance 4. An audit imposes financial discipline which is useful for growing companies. 5. It may be easier to obtain credit, as suppliers and credit rating agencies regard the additional assurance provided by an audit important.

Question 29

How and why the level of assurance provided by a report on profit and cash flow forecasts differs from the level of assurance provided by an auditor's report on annual financial statements.

Answer 29

1. An audit conducted in accordance with auditing standards provides a high level of assurance which is reasonable but not absolute. 2. The delay between the reporting date and the date of the auditor's report means that the even items such as provisions/estimates can often be substantiated. 3. A review of forecasts is only likely to provide a moderate level of assurance. 4. This is because financial statements are based on historical information, and forecasts are based on assumptions which are subject to uncertainty.

Question 30

When a question asks you to consider the specific matters to consider, what does this mean?

Answer 30

Check this!!!