Review Notes

Question 1

Why they are quality engagement reviews carried out? (4 points)

Answer 1

• To evaluate significant judgements and conclusions made.
• To address quality risks
• To consider compliance w/ ethical requirements
• Form an opinion on appropriateness/adequacy of applied safeguards

Question 2

When are quality engagement reviews likely to be carried out? (6 points)

Answer 2

• Listed or public interest entities
• If required by laws/regulations
• If engagement is complex
• Where significant judgements, skills or knowledge are required
• Engagements w/ a history of issues – e.g. internal control deficiencies
• Engagement on new/emerging business/industries

Question 3

Risk at financial statement level

Answer 3

Pervasive risks that affect the financial statements as a whole

Question 4

Risk at assertion level

Answer 4

Relate to specific assertions made by management regarding individual transactions, account balances, or disclosures.

Question 5

Characteristics of risks at the financial statement level (3)

Answer 5

• Impact is widespread, not limited to a single account.
• Often related to organisational environment or overall control weaknesses.
• Usually requires overall changes to audit strategy: more experienced staff, more professional scepticism, more substantive procedures, etc.

Question 6

Characteristics of risks at the assertion level (3)

Answer 6

• More account-specific.
• Risks affect one account or disclosure rather than the entire financial statements.
• Audit response typically focuses on targeted procedures for the affected assertion(s).

Question 7

Examples of risks at the financial statement level (3)

Answer 7

• Weak supervision.
• Company in financial distress → increased risk of bias or fraud.
• Significant changes in IT or control environment.

Question 8

Examples of risks at the assertion level (3)

Answer 8

• Inventory may be overstated (existence/valuation).
• Revenue cutoff errors at year-end (occurrence/cutoff).
• Allowance for doubtful accounts may be insufficient (valuation).

Question 9

3 Threats of acting for two competing clients

Answer 9

• Perceived threat of disclosure and possible impact on confidentiality
• Conflict of interest
• Meaning it is difficult to act in best interests of both clients

Question 10

Actions when acting for two competing clients (2)

Answer 10

1. Notify both clients.
2. Obtain permission from both clients.
   - If permission is refused: only act for one client

• If permission is given, implement safeguards

Question 11

Safeguards when acting for two competing clients (7)

Answer 11

• confidentiality agreements
• separate partners and teams
• independent partner review
• information barriers
• physical separation of teams
• regular review of safeguards.
• consult the ethics partner or function.

Question 12

3 Significant reviews that may affect audit future

Answer 12

1. Kingman review
2. Competitions and Market Authority’s Review (CMA)
3. Brydon Report

Question 13

What are 4 recommendations in the Kingman Review?

Answer 13

1. Apply tougher penalties/corrective measures for corporate failure.
2. Directly regulate the biggest audit firms
3. Require rapid explanations from companies.
4. Publish reports about company’s conduct + management

Question 14

What does the Kingman review recommend re FRC?

Answer 14

Abolish it and replace it with a new Audit, Reporting and Governance Authority (ARGA)

Question 15

What are 4 recommendations in CMA?

Answer 15

1. Greater oversight of audit committees and the role they play to ensure audit quality.
2. A split between the Big Four’s audit and non-audit businesses to ensure focus on quality.
3. A five-year review of the state of the industry.
4. Mandatory joint audits to increase the ability of smaller firms to compete with the Big-Four

Question 16

What are 4 examples of recommendations in the Brydon Report?

Answer 16

1. Separation of the audit profession from the accounting profession.
2. Improved auditor transparency - publish profitability of audit work.
3. Increase audit responsibilities beyond the financial statements
4. Clear separation between audit team and team which negotiates the audit fees.

Question 17

General audit judgements to be reviewed in an engagement quality review (4)

Answer 17

· Determination of materiality
· Composition of engagement team
· Risk assessment process
· Proposed audit opinion

Question 18

Lack of evidence - considered pervasive and material

Answer 18

Disclaimer opinion - we don’t express an opinion

Question 19

Lack of evidence - considered not pervasive but material

Answer 19

Qualified opinion

Question 20

Extension rules - extend 5 yrs to 7yrs for engagement partner of listed company

Answer 20

It’s deemed necessary to safeguard the quality of the engagement by the audit committee – e.g. no other partner with the knowledge is available and considered the reasonable and informed 3rd party test.

Question 21

What may an increase in inventory days suggest

Answer 21

Presence of obsolete inventory

Question 22

No limitations of scope meaning

Answer 22

Auditor received unrestricted access to sufficient and adequate evidence needed to form an opinion

Question 23

If total fees/firm fees for a listed company is between 5-10% what should you do (3 things)

Answer 23

1. Disclose to the ethics partner
2. Disclose to those charged with governance including the audit committee
3. Discuss threats to integrity, objectivity and independence
4. Adopt safeguards to reduce the threat level:
   - Reduce non-audit work
   - Independent internal quality review
   - Separate teams for non-audit work
   - Monitor fees