Chapter 1: Basics

Question 1

Elements of assurance engagement (5)

Answer 1

1. 3 party relationship
2. Subject matter
3. Suitable criteria
4. Evidence
5. Assurance report

Question 2

3 party relationship (3)

Answer 2

• Practitioner (audit firm)
• Responsible Party (directors and management)
• Intended users (shareholders)

Question 3

Subject matter (3)

Answer 3

• Data such as F/S
• prepared by responsible party
• for practitioner to evaluate

Question 4

Suitable criteria (3)

Answer 4

• Rules against which the subject matter is evaluated
• in order to reach an opinion
• AFRF

Question 5

Evidence (3)

Answer 5

• Information (Sufficient & Appropriate) used by the practitioner
• in arriving at the conclusion
• on which their opinion is based

Question 6

Assurance report (3)

Answer 6

• Report with practitioner’s option
• Issued to intended users
• after evidence collection

Question 7

Advantages of statutory audits (5)

Answer 7

1. Increases credibility of F/S
2. Confirms mgmt to have performed their statutory duties correctly
3. Assurance to mgmt to have complied with non-statutory requirements
4. Provides feedback on effectiveness of internal controls.
5. Internal controls = weak/inadequate, auditor will give recommendations for improvement. (reduce risk and improve performance)

Question 8

Inherent limitations of an Audit (7)

Answer 8

1. High cost
2. Disruption to the staff of the company
3. Subject matter could be based on estimates > subjective opinion > truth and fairness uncertain
4. Frauds deliberately misrepresent info and conceal the truth
5. Use of sample testing
6. Client’s system are going to have some degree of limitations regardless of being really strong
7. Audit evidence = persuasive rather than conclusive

Question 9

Stewardship (4)

Answer 9

• Directors have stewardship role of a company
• They look after its assets
• manage them on behalf of shareholders
• Act as agent of shareholders
• legal duty to act in best interests of the principal (sh)

Question 10

Accountability (4)

Answer 10

• Directors as agents of SH are accountable to SH
• To show accountability
• by preparing annual F/S
• presented to SH for their approval

Question 11

(true and fair view presentation) (3+2)

Answer 11

1. True = free from error
2. Fair = no undue bias in F/S or way they are presented
3. True and fair = judgement being given that
   - F/S can be relied upon
   - prepared properly in acc. with appropriate AFRF

Question 12

MGMT responsibility relating to audit (5+3)

Answer 12

1. Prevention/detection of fraud
2. Preparation of F/S
3. Design and implementation of effective internal controls
4. Providing auditor with
   - access to info for prep of F/S
   - additional info relating to audit
   - unrestricted access to person whatever he requires to perform audit
5. Providing written representations to the auditor at the end of the audit.

Question 13

Professional Skepticism (5)

Answer 13

Maintaining Professional Skepticism throughout the audit is necessary to reduce the risk of:

1. Overlooking unusual transaction
2. Over generalizing when drawing conclusion from audit observation
3. Using inappropriate assumptions in determining the nature, timing and extent of audit
   procedures and evaluating result thereof
4. Critical assessment of audit evidence
5. identification of material misstatement

Question 14

Professional judgement meaning (4)

Answer 14

• a professional accountant making informed decisions
• about courses of actions that are appropriate in the circumstances during audit engagement
• in context of auditing, accounting, and ethical standards
• by applying relevant training knowledge, and experience

Question 15

Uses of Professional Judgement (5)

Answer 15

Necessary for decisions relating to:

• Materiality and audit risk
• Nature, timing and extent of audit procedures used to obtain audit evidence
• Evaluate whether sufficient appropriate audit evidence has been obtained
• Evaluation of management judgement in applying appropriate financial reporting framework
• Drawing conclusion based on audit evidence obtained. For e.g. assessing the
  reasonableness of the estimates by the management

Question 16

Reasonable assurance (4)

Answer 16

• High but not absolute level of assurance
• provided by practitioner’s conclusion
• expressed in a positive form
• usually expressed in statutory audits

Question 17

Limited assurance (4)

Answer 17

• Moderate level of assurance
• provided by practitioner’s conclusion
• expressed in a negative form
• usually expressed in review engagements