Chapter 2

Question 1

What is the job of the directors other than managing the business?

Answer 1

Assessing what business risks face the company and devising the relevant strategies in order to deal with them.

Question 2

It is not the auditors job to set the strategies to deal with a business risks. However, what must the auditor do?

Answer 2

The auditor must understand the risks facing the business and understand how it will impact on their approach to the audit or other assurance engagement.

Question 3

What is the general role of the director according to the 2006 companies act?

Answer 3

Act in the way most likely to promote the success of the company, for the benefit of its members as a whole.

Question 4

Who must safeguard the companies assets as per the companies act 2006? How do they do this?

Answer 4

The directors of the company.

They do this by taking reasonable steps to prevent fraud and other irregularities within a company.

Question 5

How do directos prevent fraud and other irregularities and thus protect the companies assets? e.g.s?

Answer 5

They do this by implementing controls and systems to safeguard the assets and make sure than they run effectively.

e. g.’s:
1. The safekeeping of documents of title to land and building and other assets.
2. The setting of authority limits, ie, the limitation of what any one individual can do without consulting someone else
3. Implementing other procedures to prevent fraud and reduce the likelihood of error

Question 6

What is the role of the directors with regard to the books and records of the company?

Answer 6

They are legally required to keep proper accounting records which disclose with reasonable accuracy at any time the financial position of the company.

This requires records of the following:

• Cash payments and receipts
• What the payments and receipts relate to
• The assets (including non-current assets and inventory)
• The liabilities

Question 7

What is the role of the directors with regard to the preparation and delivery of company financial statements? What must they do when preparing these statements?

Answer 7

they must prepare these statements, which must give a true and fair view of the affairs of the company at the end of the accounting period, and of the P&L of the company for that period.

Directors must:

1. select suitable accounting policies and apply them consistently.
2. make judgements and estimates which are reasonable and prudent.
3. Comply with applicable accounting standards.
4. prepare the FS on a going concern basis unless it is inappropriate to assume that the company will continue in business.

Note the directors must also take the prepared FS and present them to the members of the company in general meeting and delivered to companies house within the specified time frame.

Question 8

Whose responsibility is it that companies follow the laws and the regulations?

Answer 8

Management.

Question 9

What is the responsibility of the external auditor determined by?

Answer 9

1. The requirements of any legislation/regulation under which the engagements are carried out.
2. The terms of engagement for the assignment, which will specify the services to be provided.
3. Ethical and professional standards.
4. Quality control standards

Question 10

as per the 2006 companies act, what is the responsibility of the external auditor?

Answer 10

1. form an independent opinion on the truth and fairness of the annual accounts.
2. confirm that the annual accounts have been properly prepared in accordance with the CA 2006.
3. state in their auditor’s report whether in the opinion the information given in the directors’ report and strategic report is consistent with the annual accounts.

Question 11

As per the 2006 companies act, how does an external auditor achieve his objectives?

Answer 11

1. the audit is planned properly.
2. sufficient appropriate audit evidence is gathered
3. the evidence is properly reviewed and valid conclusions are drawn.

Question 12

the appointment as the companies act auditpr does not lead to responsibility for…?

Who are these the responsibility of?

Answer 12

1. The design and operation of the accounting systems
2. The maintenance of the accounting records.
3. The preperation and accuracy of management information
4. The preperation of financial statements
5. The id of every error and deficiency in the accounts and the accounting records.
6. The prevention of fraud in the company.
7. The detection of immaterial fraud in the company/
8. Ensuring that the company has complied with the laws and regulations that are relevant to its business (except insofar as it affects the financial statements).

These are the responsibility of management

Question 13

What are the rights as per the 2006 CA to auditors to ensure that they can fulfill their responsibilities?

Answer 13

1. The right of access at all times to the company’s books and accounts.
2. The right to obtain any information necessary for the audit from any officer or employee of the company.
3. The right to attend any general meeting of the company.

Note it is an offence of the CA 2006 to provide the auditor with false or misleading information.

Question 14

if an audit firm is contracted to supply non-assurance services to a firm such as assisting with maintenance of its accounting records or perhaps preparing management information, who is responsible?

Answer 14

Management will still remain responsible for all matters like this as the audit firm is only employed as support to management, providing expert assisstance.

Question 15

Who are the PCAOB and what are they entitled to do?

Answer 15

Public company accounting oversight board

They were set up to inspect audit files of major us listed companies and us subsidaries. Therefore, auditors of subsidaries of US companies must register (for a fee) with PCAOB and are liable to inspection.

Question 16

What are the two types of tests? And how do they work?

Answer 16

Tests of control and tests of detail

The more resiliance that can be put on controls (assessed by testing controls), the fewer tests of detail may be carried out.

Question 17

What is an error?

Answer 17

An unintentional misstatement in financial statements, including the omission of an amount or a disclosure.

Question 18

What are internal controls?

Answer 18

“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 controls.”

Question 19

by testing internal controls, what can you tell about the company?

Answer 19

This tells you that the system is capable of preventing or detecing and correcting errors and that it operates efficiently. Thus, the auditor will be able to conclude that the system is strong and the risk of FS containing errors is reduced.

This is also means that lower tests of detail will be carried out.

Question 20

If an auditor finds material weakness, what must they do?

Answer 20

• Report these finding to management

- Carrying out additional tests of detail to uncover any potential errors as a result of weakness

Question 21

Who is responsible for drawing conclusions as to whether the FS are free from material misstatements? and what causes these?

Answer 21

Auditors. This is cause by fraud.

Question 22

What are the auditors responsibilities when it comes to fraud?

Answer 22

• Assessing the risks of material misstatement

- Discussing the susceptibility of the FS to material misstatement caused by fraud.

Question 23

What are the auditors responsibilities when it comes to fraud?

Answer 23

• Assessing the risks of material misstatement

- Discussing the susceptibility of the FS to material misstatement caused by fraud.

Question 24

What should auditors follow in order to have a reasonable expectation of detecting fraud or error?

Answer 24

ISA (UK) 240

Question 25

The audiotr must provide ..... that the FS are free from material misstatement, whether caused by error or fraud

Answer 25

Reasonable assurance. the auditor cannot provide complete assurance as audit testing is not designed to provide this assurance.

Question 26

What shoulf the auditor do should they suspect fraud?

Answer 26

If they identify misstatement then they should consider the implications of this on other parts of the audit. particularly managmenet representations which may not be trustworthy igf fraud is detected.

Question 27

what must auditors get in writing?

Answer 27

That management have aknowledged its responsibility to design and implement internal controls to prevent and detect fraud and that management has disclosed any known fraud by management. They must also make sure management say in writing the results of its asessment and whether the FS can be materially affected by fraud.

Question 28

During the course of your audit of Slipstream Ltd the credit controller asks for a private interview with you. During this interview, she makes it known that she suspects the chief accountant of misappropriating company funds received from debtors and altering the books. What steps would you take to enable you to assess whether the credit controller's suspicions are reasonable?

Answer 28

- review and obtain photocopies of docs which have aroused her suspicions. - enquire in to the reasons for altered pages in books/documents etc - investigate any apparent override/circumvention of company procedure, eg, cancelling a sales invoice instead of raising a credit note - Review of previous management letters for any weaknesses facilitating misappropriations - Consider credit controller's motives for putting chief accountant's standard of living; make enquiries about his lifestyle. - Consider whether past dealings with chief accountant have ever cast doubt on his integrity. - Increase analytical procedures on revenue and receivables, eg, monthly revenue/receipts of major customers/extend circulisation if trade receivables collection period has increased. - Discuss with engagement partner, who may wish to discuss with client (eg board of directors)

Question 29

During the course of your audit of Slipstream Ltd the credit controller asks for a private interview with you. During this interview, she makes it known that she suspects the chief accountant of misappropriating company funds received from debtors and altering the books. What steps would you take to enable you to assess whether the credit controller's suspicions are reasonable?

Answer 29

- review and obtain photocopies of docs which have aroused her suspicions. - enquire in to the reasons for altered pages in books/documents etc - investigate any apparent override/circumvention of company procedure, eg, cancelling a sales invoice instead of raising a credit note - Review of previous management letters for any weaknesses facilitating misappropriations - Consider credit controller's motives for putting chief accountant's standard of living; make enquiries about his lifestyle. - Consider whether past dealings with chief accountant have ever cast doubt on his integrity. - Increase analytical procedures on revenue and receivables, eg, monthly revenue/receipts of major customers/extend circulisation if trade receivables collection period has increased. - Discuss with engagement partner, who may wish to discuss with client (eg board of directors)

Question 30

What is the expectations gap? What is an example of this?

Answer 30

The expectations gap is where there is e.g. users of the FS believe that all types of fraud should be uncovered from a statutory audit, however, it is only meant to uncover those with a material effect.

Question 31

Statutory audit role is to report on FS as whole not detect all fraud. This kind of engagement would be agreed on a seperate engagement letter in which the contents would only be known by the responsible parties. What is the problem with this?

Answer 31

Society will not get to see the EL and thus the scope of work of the audit. Whether statutory or non-statutory. Thus, societies view that auditors should always detect fraud is an issue that wont go away

Question 32

Statutory audit role is to report on FS as whole not detect all fraud. This kind of engagement would be agreed on a seperate engagement letter in which the contents would only be known by the responsible parties. What is the problem with this?

Answer 32

Society will not get to see the EL and thus the scope of work of the audit. Whether statutory or non-statutory. Thus, societies view that auditors should always detect fraud is an issue that wont go away.

Question 33

Statutory audit role is to report on FS as whole not detect all fraud. This kind of engagement would be agreed on a seperate engagement letter in which the contents would only be known by the responsible parties. What is the problem with this?

Answer 33

Society will not get to see the EL and thus the scope of work of the audit. Whether statutory or non-statutory. Thus, societies view that auditors should always detect fraud is an issue that wont go away.

Question 34

What is "non compliance" with laws and regulations?

Answer 34

Non-compliance = acts of omission or commission intentional or unintentional by management/those charged with governance/the entity/ other individuals working for or under the direction of the entity which are contrary to the prevailing laws or regulations.

Question 35

what areas of the law should an auditor look out for to ensure that the company complies with the law?

Answer 35

- Employment law - Social security law - Health and safety law Co.'s need to comply with their relevant laws and regulations, and auditors are required to obtain sufficient evidence that about compliance with the laws and regs that have a direct effect on the determination of material amounts in the FS. For further info on why these laws effect the companies go to page 31

Question 36

If auditor suspects non-compliance, what should they do?

Answer 36

Must discuss with the appropriate level of management, unless they are not allowed to by law. - they must also provide appropriate audit evidence in order to substantiate this position. If they cannot, it may provide a limitation on the scope of the audit and limit the auditor from being able to provide an unmodified opinion on the financial statements.

Question 37

in the case of an audit of the annual accounts as per the companies act 2006, what is the external auditors responsibility?

Answer 37

It is his responsibility to: - Form an independant opinion on the truth and fairness of the annual accounts. - confirm that the annual accounts have been properly prepared in accordance with the CA 2006. - state in their auditor's report whether in the opinion the information given in the director's report and strategic report is consistent with the annual accounts.

Question 38

What rights do the auditors have as per the 2006 companies act in order to allow them to perform their responsibilities

Answer 38

1. The right of access at all times to the company's books and accounts. 2. The right to obtain any information necessary for the audit from any officer or employee of the company. 3. The right to attend any general meeting of the company.

Question 39

What is the PCAOB and why is it significant?

Answer 39

This is the "public companies accounting oversight board". This came to fruition from sarbanes-oxleys act. They are entitles to inspect the audit files of a major subsidaries of US listed companies. Auditors of subsidaries of US listed companies must register with PCAOB, and are liable to inspection. Shows how US domestic law can affect overseas companies.

Question 40

With regard to internal controls. what is managements job?

Answer 40

They are responsible for designing and implementing a system of internal controls that are capable of preventing, or detecting and correcting, errors in financial records.

Question 41

What is the definition or error as per ICAEW?

Answer 41

An unintentional misstatement in financial statements, including the omission of an amount or disclosure.

Question 42

With regard to internal controls. what is the auditor's role?

Answer 42

To assess the system of internal controls as part of his risk assessment, and determine whether he believes (i.e. express an opinion) as to whether he believes they are capable of preventing or detecting and correcting errors.

Question 43

What does ISA 315 "Identifying and assessing the risks of material misstatements through understanding of the entity and its environment" require auditors to do?

Answer 43

- Obtain an understanding of controls relevant to the audit - evaluate the design of those controls; and - determine whether they have been implemented

Question 44

if an auditor finds material weakness, what is his responsibility?

Answer 44

- report these to management | - carrying out additional tests of detail to uncover any potential errors as a result of the weakness.

Question 45

What are the two types of risks of misstatement that can arise from fraud?

Answer 45

1. Misstatements arising from fraudulent financial reporting; and 2. Misstatements arising from misappropriation of assets.

Question 46

What does ISA 240 "The auditors responsibilities relating to fraud in an audit of the financial statements" state the responsibilities of the auditor is?

Answer 46

- Assessing risks of material misstatement | - Discussing the susceptibility of the financial statements to material misstatement caused by fraud.

Question 47

What is a key issue in relation to discovering material misstatement caused by fraud?

Answer 47

Professional scepticisim. *refer to page 28 of study bank for list on FS susceptibility to fraud.

Question 48

What should the auditors get from managment with regard to fraud?

Answer 48

A WRITTEN REPRESENTATION from managment that they aknowledge their responsibility to design and implement internal controls to prevent and detect fraud, and that management has disclosed any known or suspected frauds by management, employees with a significant role in internal control, or any other frauds which might have a material impact on the financial statements to the auditor.

Question 49

When the auditors become aware of non-compliance, whaat should they do?

Answer 49

First, they should gain an understanding of the non-compliance together with information to evaluate its effect on the financial statements They should then discuss with appropriate level of management unless its prohibited by law (ISA 250)

Question 50

what if the auditor cannot gather enough evidence with regard to the suspected non-compliance?

Answer 50

This could lead to a limitation on the scope of the audit, which will result in the auditors not being able to give an unmodified opinion (ISA 250)

Question 51

When should an auditor seek legal advice with regard to non-compliance?

Answer 51

If the auditor feels/suspects that those charged with governance are involved in any way with the non-compliance, the auditor shall communicate the matter to the next higher level of authority at the entity, if it doesnt exist then they should seek legal advice.

Question 52

When should an auditor disclose non-compliance to the shareholders?

Answer 52

The auditor should do this in cases where it feels the financial statements don't give a true or fair view or the auditor has a fundamental uncertainty.

Question 53

Within an external audit, what is the role of the auditor with regard to money laundering?

Answer 53

It should not be included within the audit. However, the auditor should always make reports where it is known or suspected (on all instances, material or immaterial)

Question 54

What should the auditor make sure they don't do when it comes to money laundering, and ensuring they gather enough information.

Answer 54

"TIPPING OFF" - when they alert management or those involved of the situation

Question 55

Why is it important for management to mitigat bribery in a firm? Who do auditors have a duty to report bribery to?

Answer 55

As firms can be held responsible, and further punished as a result of failing to report suspected bribery within a firm. Auditors should report bribery to the National crimes agency (NCA) under the proceeds of crime act (2002)

Question 56

What does the proceeds of crime act regard a bribery payment as?

Answer 56

They regard a bribery payment if it leads to "improper performance by another person, which amounts to a breach of an expectation that a person will act impartially and in good faith."

Question 57

what is the legal test for what should be seen as an improper payment from one person to the other?

Answer 57

What would a reasonable person in the UK expect of a person performing the relevant function properly?

Question 58

a company collecting, holding, using, disclosing, retaining or destroying information about an individual is required to apply what?

Answer 58

The General data protection regulations (GDPR) and teh data protection act

Question 59

an org that processes information must inform who? Punishment for not notifying the ICO?

Answer 59

the information commisioner's officer (ICO). notification s required every year. Failure to notify the ICO is a criminal offence

Question 60

What is required of management with regard to related parties?

Answer 60

Management should disclose to the auditor all related party relationships and amounts so that the readers of the financial statements can decide fr themselves whether such transactions have led to a manipulation

Question 61

According to ISA 550, why is the risk of material misstatment higher when it comes to related party transactions?

Answer 61

1. The complexity of related party relationships and structures 2. Information systems that may be ineffective at identifying related party transactions. 3. Normal market terms may not apply, for example transactions may be conducted with no exchange of consideration.

Question 62

what are the specific procedures that should be carried out with regard to related parties?

Answer 62

- Detailed tests of transactions and balances - Reviewing minutes of meetings of shareholders and directors to observe if any related parties or transactions with them become apparent. - reviewing records for large or unusual transactions or balances, particularly those recognised near the end of the reporting period. - reviewing confirmation of loans receivable and payable and confirmations from banks (which might indicate guarantor relationships)

Question 63

We understand that where an accountant has grounds for suspicion of money laundering in an audit, they should report it. When would there be an exception to this? And what is the caveat to this exception?

Answer 63

The auditor would not need to report ML to the NCA if the auditor is operating under Legal professional privilege (LPP). However, it is important to remember that there is no LPP audits!

Question 64

What would be two contrasting examples of suspected/actual money laundering?

Answer 64

1. When you are unsure of where the money has come from from a client and you have exhausted all reasonable lines of enquiry. 2. offences involving saved costs. e.g. failing to implement health and safety requirements or environmental requiremets.

Question 65

Before the NCA, who should auditors report the money laundering to? What should they do?

Answer 65

Auditors should report the money laundering to their money laundering reporting officer (MLRO) within their firm. The MLRO should then decide whether to report the matter to the NCA and if appropriate, make the report.

Question 66

what is the documentation requirement coming from the proceeds of crime act?

Answer 66

The firm will need to keep the firms evidence on file for six years after they cease to be a client

Question 67

Why may an auditor fail to spot money laundering?

Answer 67

Money launderers love to overstate income and love to pay tax on this, too. This goes against the grain of the way an auditor may think.

Question 68

What is the expectations gap?

Answer 68

This is the gap between the expectations of users of assurance reports and the audit firms responsibilities in respect of those reports

Question 69

what are beliefs that the public gets wrong when looking at the auditors role?

Answer 69

- Believe its the auditors job to preparing FS - The public thing the auditors job is to detect fraud, when in fact it is the auditors job to detect whether the FS are materially misstated. - Public don't understand the concept of materiality - Public generally believe that an auditors report attached to the financial statements means they are correct, rather than just meaning that there is reasonable assurance the FS give a true and fair view.

Question 70

why is an engagement letter important for an audit?

Answer 70

This is because the engagement letter includes a paragraph reminding the directors of their responsibilities and setting out the firm's responsibilities.

Question 71

as per the corp gov code, listed firms should ensure that they have an audit committee. what is the purpose of this committee?

Answer 71

It serves as a reminder of the division of responsibilities between auditors and management. The disclosures made in the company annual reports about its corp governance practices should include comments about the operations of its audit committee.

Question 72

as per the corp gov code, listed firms should ensure that they have an audit committee. what is the purpose of this committee?

Answer 72

It serves as a reminder of the division of responsibilities between auditors and management. The disclosures made in the company annual reports about its corp governance practices should include comments about the operations of its audit committee.

Question 73

When an auditor doesnt detect material misstatement, something must have gont wrong in what areas?

Answer 73

1. Planning the audit 2. Performing the audit 3. Drawing conclusions from the audit.

Question 74

If there were problems in planning the audit, performing the audit or drawing conclusions from the audit, what may be four causes for this?

Answer 74

1. The failure to assess risk properly by the auditor 2. The failure to respond appropriately to the audit risk 3. The failure to recognise and respond to situations where the auditor's objectivity is threatened 4. the failure to recognise and respond to situations beyond the auditor's area of competence.