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ACCA- F8 Audit and Assurance (International) QUICK QUESTIONS Set 1

Questions
1. What two types of risk make up detection risk? 2. What two risks contribute to the risk of material misstatement in the financial statements? 3. What are the three components of audit risk? 4. When the audit firm changes, the proposed new auditor should contact the retiring auditor. If the client refuses permission for communication to take place, what should the proposed new auditor do? 5. What are the suggested limits for the percentage of total fees coming from any one client (ordinary clients and special interest clients)? 6. What is a familiarity threat?

Answers
Sampling risk and non-sampling risk. Inherent risk and control risk

Inherent risk, control risk and detection risk Decline the appointment

15% for ordinary; 10% for special interest.

7. ACCA suggest that lead audit partners should be rotated no less frequently than how many years? 8. What six threats can relate to objectivity, integrity and independence? 9. In relation to corporate governance, what is meant by the agency problem?

Because of a close relationship, members of the assurance firm become too sympathetic to members of the client firm, so that objectivity and skepticism are lost. ACCA suggest that the lead partner should be changed at least every 5 years. Self-interest, Self-review, Familiarity, Advocacy, Intimidation, Management Shareholders own the company and are its principles. Directors run the company and are the agents of the shareholders. There can be a problem if directors to not run the company in the best interests of the shareholders (eg excessive remuneration is arranged for the directors). Corporate governance: the system by which companies are directed and controlled An audit is the independent examination of, and expression of opinion on, the financial statements of an entity. The roles of Chief Executive Officer and Chairman should be split.

10. Define corporate governance 11. Define an audit

12. The UK Corporate Governance Code states that there should be a clear division between the running of the board and the executive responsibility for the running of the companys business. To comply with this, what roles should be split?

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13. What sub-committee of the board of directors is responsible for finding new directors? 14. What sub-committee of the board of directors is responsible for determining directors pay? 15. How many non-executive directors should be on a board of directors to comply with the UK Corporate Governance Code? 16. What is a NED? 17. In relation to corporate governance, what does comply or explain mean? 18. The purpose of corporate governance is to facilitate effective entrepreneurial and prudent management that can deliver long-term success of the company. What are the five main principles of the UK Corporate Governance Code? 19. What is a statement of circumstances?

The nomination committee

The remuneration committee

NEDS not less than 50% of board; not less than 2 in small companies

A NED is a non-executive director Listed companies are expected to comply with the corporate governance code or, if they dont, explain why not. Leadership Effectiveness Accountability Remuneration Relations with shareholders A statement of circumstances is a statement that auditors are required to make upon resignation or removal as auditors. It will state whether there are any untoward reasons for their removal or resignation such as noncooperation by the directors. The International Standards on Auditing are set by International Auditing and Assurance Standards Board (IAASB) part of the International Federation of Accountants (IFAC) There is a limitation on the scope of the practitioners work. The assertion is not fairly stated, and the subject matter information is materially misstated. A negative assurance

20. Who sets the International Standards on Auditing?

21. What are the two general reasons that would lead a practitioner not to issue an unqualified conclusion to an assurance engagement? 22. What is another name for a limited assurance engagement? 23. What are the five elements of an assurance engagement?

24. What are the five fundamental principles of the ACCAs ethical code?

A three party relationship involving a practitioner, a responsible party, and intended users An appropriate subject matter Suitable criteria Sufficient appropriate evidence A written assurance report in the form appropriate Integrity Professional competence and due care Confidentiality Professional behaviour Objectivity

25. What are the two categories of substantive test?

Analytical procedures and tests of detail

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Set 2

Questions
1. What are the two general classes of control found in computer systems?

Answers
General controls development, prevention of unauthorised changes etc., backup. Can be classified as development and administrative controls. Application controls initiation, recording, processing and recording transactions. i. The control environment ii. Risk assessment process iii. Control activities iv. Information system v. Monitoring controls Substantive tests would be carried out in preference to tests of control if: controls did not exist or were not operating effectively, or there were relatively few transactions so that substantive tests were more efficient. The auditor must examine the experts work with respect to: consistency with other evidence, assumptions made, use and accuracy of source data. The third parties should be: qualified, experienced, independent and professional The auditor should agree the following in writing: * Nature, scope and objectives of work * Respective responsibilities * Nature, scope and timing of communications

2. What are the five components of internal control?

3. Under what conditions would substantive tests be carried out instead of tests of control?

4. What aspects of a third party experts audit work should an auditor examine? 5. What qualities should the auditor look for in third parties who are carrying out some audit work? 6. What matters should the auditor agree with third parties who are carrying out some audit work?

7. What aspects of a clients undertaking is computer test data used to test? 8. What aspects of a clients undertaking do computer audit programs examine? 9. Does non-sampling risk increase or decrease as the sample size increases? 10. Does sampling risk increase or decrease as the sample size increases?

* That the expert observes confidentiality The operation of the clients computer programs.

Computer audit programmes examine client data.

Non-sampling risk does not depend on sample size. This risk is affected by the experience and ability of the auditor, supervision and planning. As more items are examined in the sample, sampling risk decreases.

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11. List six types of sampling:

12. What are the sources or procedures for obtaining of audit evidence? 13. ISA500 states that auditors must obtain xxxxxxxxxxxxx xxxxxxxxxxxxx audit evidence to be able to draw reasonable conclusions on which to base an audit opinion. What words are represented by xxxxxxxxxxxxx xxxxxxxxxxxxx ? 14. What are the audit assertions as represented by ACCA COVER?

* Random selection, * Systematic selection, * Haphazard selection, * Sequence/block selection, * Monetary unit sampling, * Stratified sampling. Analytical procedures, enquiry, confirmation, inspection, observation, recalculation and reperformance Sufficient appropriate

Accuracy Completeness Cut off Allocation Classification and understandability Occurrence Valuation Existence Rights & obligations (ownership) Current audit file (details this years work) and permanent audit file (holds more permanent information such as organisation charts, letters of engagement etc). Managers, not auditors, are responsible for the prevention or detection of fraud. However, auditors should be aware of material misstatement due to fraud. Once discovered, fraud should be reported to appropriate management. Materiality relates to financial statements as a whole. Additionally, a lesser amount is set when designing audit procedures to reduce the risk that misstatements in aggregate exceed FS materiality. This is performance materiality. A matter is material if it omission or misstatement would reasonably influence the economic decisions users. These processes are usually carried out at the interim audit stage.

15. What are the two types of audit file?

16. What are auditors duties with respect to fraud?

17. What is performance materiality?

18. Define materiality 19. At which stage of an audit (interim or final) will the documentation of systems and procedural tests usually be carried out?

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20. What are the six objectives of audit planning?

21. A common element of analytical procedures is ratio analysis. Name three sources of comparison for any ratios calculated.

The six objective of audit planning are to * Ensure that appropriate attention to important areas * Identify potential problems * Ensure that work is completed expeditiously * Help with the proper staffing and work assignment * Coordinate with other parties * Facilitate review Previous years ratios, Budget ratios, Industry standard ratios

22. Are analytical procedures part of tests of control or Substantive tests substantive tests? 23. What is sampling risk? 24. What is another name for a reasonable assurance engagement? 25. What are RQBs and RSBs? The risk, that because the auditor is relying on a sample, conclusions drawn about the population are wrong. A positive assurance

To be an auditor, the person must: Pass an approved set of professional examinations, set by a Recognised Qualifying Body (RQB) eg the ACCA Become a member (and stay a member!) of a Recognised Supervisory Body (RSB) eg the ACCA

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Set 3

Questions
1. For how long after the date of the statement of financial position should going concern be assessed? 2. Define a non-adjusting event.

Answers
12 months

3. Define an adjusting event

4. What is the correct treatment of a contingent asset where the inflow of economic benefits is not probable? 5. What is the correct accounting treatment of a contingent liability where the outflow of resources is probably not required? 6. Define a contingent liability 7. Is cut-off correct if an item is included in closing inventory, a sales despatch note has not been issued and no sales invoice has been issued. 8. Is cut-off correct if an item is not included in closing inventory, no goods received note has yet been issued, but a supplier invoice has been received and processed? 9. Is cut-off correct if an item is included in closing inventory, if a goods received note has been issued, but no supplier invoice has been received or accrued for? 10. What are the two types of receivables circularisation?

A non-adjusting event is one that relates to conditions that arose after the date of the statement of financial position. An adjusting event is one which provided evidence of conditions that existed at the date of the statement of financial position. No disclosure; no provision

Disclose but do not make a provision.

A contingent liability is a possible liability arising from past events. existence confirmed by future events This is correct and is the normal position for closing inventory.

Cut-off is incorrect. If the item is not in inventory because it has not been received, it should not be in purchases and payables

Cut-off is incorrect. If an item is included in closing inventory it needs to be accounted for in purchases. Therefore debit purchases and credit either payables or purchases reserve. Positive: where everyone should reply whether or not the balance is in agreement. Negative: where only those disagreeing with the balance should reply. The audit assertions relating to presentation and disclosure are: * Occurrence * Rights and obligations * Completeness * Classification and understandability * Accuracy * Valuation

11. What are the audit assertions relating to presentation and disclosure?

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12. What are the audit assertions relating to year end balances?

13. What audit assertions relate to transactions?

14. ISA 315 categorises audit assertions into three groupings. What are those groupings?

15. To whom should the auditor report (a) significant control deficiencies and (b) other weaknesses?

16. What are the general methods for testing controls?

17. In an accounting system, all credit notes issues are authorised by the chief accountant. Is this an example of a control objective, a control procedure or a control test? 18. In an ICQ does the answer Yes imply that a control is present or absent? 19. In an ICEQ does the answer No imply that a control is present or absent?

20. What are the three methods that can be used to record and document accounting systems? 21. Auditors routinely report internal control matters to management in a management letter. What are the normal three headings (or columns) in such letters?

The audit assertions relating to year end balances are: * Existence * Rights and obligations * Completeness * Valuation * Allocation The audit assertions relating to transactions are: * Occurrence * Completeness * Accuracy * Cut off * Classification ISA 315, Audit evidence divides assertions into * Transactions and events * Account balances * Presentation and disclosure (a) Significant deficiencies should be communicated to those charged with governance. Defined as: when a control is designed, implemented, or operated is unable to prevent or detect misstatements on a timely basis, or such a control is missing (b) Other weaknesses should be communicated to management Enquiries, including management views, as to whether controls are operating Inspection eg of signatures on documents Observation eg watching goods received being counted Re-calculation and re-performance eg reperforming a bank reconciliation to ensure that it was properly carried out. This is an example of a control procedure. The control objective is that credit notes are issued only for legitimate reasons; the test of control would be inspecting the credit notes for the managers signature. In an ICQ the answer Yes implies that a control is present. For example Is all overtime authorised by a manager? Answer = Yes means overtime payments are controlled. In an ICEQ the answer No implies that a control is present. For example Can unauthorised overtime be paid? Answer = No means overtime payments are controlled. * Narrative notes, * Flowcharts, * Questionnaires (ICQs and ICEQs). The nature of the weakness, the possible consequence of the weakness, how to fix the weakness.

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22. What are the five inherent limitations to internal control?

23. In a computer system, what is meant by the term standing data?

24. What sort of audit report should be issued if going concern doubts are not fully disclosed in the financial statements. 25. What sort of audit report should be issued if going concern doubts are fully disclosed in the financial statements.

* Human error * Collusion * Bypass of controls * Costs of control > benefits * Non-routine transactions for which no system has been developed. Standing data (also known as reference data) does not change often. For example, wage rates or customer addresses. However, this data is often accessed and used, so an error in standing data can cause many other errors. The audit report will be qualified because the financial statements contain a material misstatement by not disclosing the going concern problem. The audit report should contain an emphasis of matter paragraph drawing users attention to the note relating to going concern. This is not a qualification because the financial statements are as right as they can be.

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Set 4

Questions
1. In a listed company, to whom should internal audit report? 2. Is the following true or false? Under the UK government code listed companies are required to have an internal audit department 3. What type of audit report is given if the FS contain a non-material misstatement? 4. What type of audit report is given if the auditors ability to find sufficient appropriate audit evidence is pervasive? 5. What type of audit report is given if the FS contain a pervasive material misstatement? 6. Is the following true or false? The inclusion of an emphasis of matter paragraph in the audit report results in a modified audit opinion.

Answers
The audit committee False. Internal audit is encouraged and the need for it has to be kept under review, but it is not mandatory.

An unmodified report (if a matter is not material, a clean audit report can be issued) Disclaimer of opinion

Adverse opinion

False. An emphasis of matter paragraph does not cause a modified opinion nor does it cause the FS to be qualified.

7. What is the title of the paragraph that can be inserted in an audit report to draw users attention to a note in the financial statements? 8. What are the two reasons for which an audit report can be qualified?

An emphasis of matter paragraph

9. Describe what is meant by fair in true and fair

10. Describe what is meant by true in true and fair 11. What are the words missing from the following extract from the audit report? Auditors Responsibility .we plan and perform the audit to obtain XXXXXXXXXXXX whether the financial statements are free from XXXXXXXXX. 12. In what circumstances would auditors refer to the directors report in their audit report?

1 The Financial Statements contain a material misstatement. 2 The auditor has not been able to obtain sufficient appropriate audit evidence to conclude that the FS are free from material misstatement. Fair: the information is free from discrimination and bias and is in compliance with expected standards and rules. It reflects the commercial substance of the transactions. True: the information is factual and conforms with reality. Auditors Responsibility we plan and perform the audit to obtainreasonable assurance whether the financial statements are free from material misstatement.

Auditors would refer to the directors report in their audit report if it contained anything that was at odds or contradictory with the financial statements.

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13. Of what do financial statements consist?

14. In what two circumstances might management representations provide the only source of audit evidence? 15. Which of the following pairs of evidence are better? External v entitys records Indirect evidence v auditor-direct Oral v Written 16. Why is it important that audits are properly documented? (Four reasons)

* Statement of financial position * Income statement * Statement of changes in equity * Cash flow statement * Notes * Any other material identified as being part of the financial statements Where knowledge is confined to management Reliance on the judgement/opinion of the directors External is better than entitys records Auditor direct is better than indirect evidence Written is better than oral

17. What range of percentage of profit is often taken as guidance for materiality? 18. Analytical procedures are used at three stages of an audit. What are these? 19. What is meant by audit risk 20. An auditor gives weekly advice to a client on a wide range of matters (financial and nonfinancial). 21. What sort of ethical threat arises from the auditor being a close friend of the financial director of the company being audited? 22. What sort of ethical threat arises from the auditor owning shares in the company audited? 23. What sort of ethical threat arises from the auditor auditing financial statements that the auditor also prepared? 24. What sort of ethical threat can arise from overdue fees? 25. What are the three elements of the ACCAs ethical framework?

To show that the audit work has been done properly To enable senior staff to review the work of junior staff To help the audit team in future years To encourage a methodical, high-quality approach. 1% of revenue 1 2% of total assets 5 10% of profit before tax The planning stage; as a source of audit evidence (substantive test); at the final review stage. Audit risk is the risk that an inappropriate audit opinion is given. A management threat.

A familiarity threat

A self-interest threat because the auditor wants the share price to rise. A self-review threat.

A self-interest threat because the auditor is anxious to be paid. fundamental ethical principles, threats to those and safeguards against the threats.

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