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Assurance > Concept of and need for assurance > Flashcards

Concept of and need for assurance Flashcards

1
Q

Elements of assurance (5)

A

3-Cats-MEW

  1. 3 party involvement
  2. Suitable CRITERIA
  3. Subject MATTER
  4. EVIDENCE
  5. WRITTEN report
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2
Q

What is the 3-party relationship?

A

PIR

  1. Practitioner; e.g. auditor, assurance firm
  2. Intended user
  3. Responsible party; e.g. directors
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3
Q

Examples of subject matter (3)

A

Financial statements, financial data, systems

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4
Q

Examples of criteria (2)

A
  1. Accounting standards

2. UK Corporate Governance Code

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5
Q

What are the two levels of assurance

A

Limited and reasonable

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6
Q

Describe limited assurance (3)

A
  1. Moderate/low level of assurance
  2. Conclusion expressed negatively
  3. Less evidence
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7
Q

Describe reasonable assurance (3)

A
  1. High but not absolute level of assurance
  2. Conclusion expressed positively
  3. More evidence
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8
Q

Define statutory audit

A

Audit of a company’s financial statements

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9
Q

Examples of what governs statutory audits? (2)

A
  1. Companies Act 2006

2. International Standards on Auditing

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10
Q

Objectives of the auditor, per ISA 200 (4)

A

COMF

  1. To COMMUNICATE with those charged with governance
  2. To express an OPINION on the financial statements
  3. To obtain reasonable assurance about whether the financial statements as a whole are free from MATERIAL MISSTATEMENT
  4. To obtain reasonable assurance about whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting FRAMEWORK
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11
Q

What must an auditor do to comply with the requirements set out in ISA 200? (4)

A

JEES:

  1. Exercise professional JUDGEMENT
  2. Comply with relevant ETHICAL requirements
  3. Obtain audit EVIDENCE that is sufficient and appropriate on which to base their opinion
  4. Plan and perform the audit with professional SCEPTICISM
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12
Q

Define professional scepticism

A

An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.

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13
Q

Define professional judgement

A

The application of relevant training, knowledge, and experience in making informed decisions about the courses of actions that are appropriate in the circumstances of the audit

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14
Q

According to Companies Act 2006, what are the requirements that exempt small private limited companies from a mandatory audit? (3)

A

Must satisfy three of the following criteria:
TET
1. TURNOVER does not exceed £10.2 million
2. No more than 50 EMPLOYEES
3. TOTAL ASSETS do not exceed £5.1 million

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15
Q

What period does Companies Act 2006 apply to?

A

Periods beginning on or after 1 January 2016

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16
Q

What are the requirements to be an auditor? (3)

A

QFC

  1. Individuals holding an appropriate QUALIFICATION
  2. Part of a FIRM controlled by qualified persons
  3. CANNOT be an officer or employee of the company being audited or a partner or employee of them
17
Q

Benefits of assurance (6)

A

CAMBIT

  1. Added CREDIBILITY
  2. Draws ATTENTION to issues
  3. Reduces risk of MANAGEMENT BIAS
  4. BY-PRODUCTS/subsidiary benefits
  5. INDEPENDENT scrutiny of the business by experts
  6. May be necessary for THIRD PARTIES
18
Q

Limitations of assurance

A

SCIMPS

  1. SAMPLING
  2. COLLUSION to defraud
  3. INHERENT limitations
  4. Use of MANAGEMENT REPRESENTATIONS as evidence may be unavoidable
  5. Evidence is generally PERSUASIVE not conclusive
  6. Financial information includes SUBJECTIVE and judgemental matters
19
Q

What is the expectations gap?

A

When shareholders and members of the public do not understand the nature of statutory audit

20
Q

Examples of misunderstandings that are part of the expectations gap

A

DACTS

  1. The auditor DETECTS all fraud and error
  2. The auditor verifies the ACCURACY of financial statements
  3. The company is guaranteed to CONTINUE to trade for the forseeable future
  4. The auditor TESTS 100% of all transactions
  5. The STATEMENT OF FINANCIAL POSITION shows the true value of the company
21
Q

What was the audit threshold prior to the Companies Act 2006?

A

For periods beginning before 1 January 2016…
No more than 50 employees
Turnover does not exceed £6.5 million
Total assets do not exceed £3.26 million

Assurance (15 decks)

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