Questions and Answers of Principles Of External Auditing

Explain briefly the following phrases included in the definition of auditing given in this chapter:(i) systematic process(ii) objectively gathering and evaluating evidence(iii) assertions about
List the major elements (or features) which are present in all audits.
Explain briefly the key differences between the following types of audits:(i) financial statement audits(ii) compliance audits(iii) operational audits.For each type of audit you need to mention who
Distinguish between:(i) auditing and accounting.(ii) internal and external audits.
Explain briefly why external financial statement audits are needed.
Explain briefly why the users of a company’s financial statement cannot examine those financial statements (and the supporting evidence) for themselves to determine whether or not the financial
The value of an audit for financial statement users lies primarily in the credibility it gives to the financial statements which are prepared by management. Explain briefly the three types of control
Explain briefly the benefits which an external financial statement audit provides for an auditee. Also explain any dangers which may result from auditors providing additional (non-audit) services to
Explain briefly the value of external financial statement audits for society as a whole. (Your answer should identify two sources of benefits an audit can provide.)
Explain briefly why the beneficiaries of a financial statement audit(financial statement users, the auditee and society as a whole) may not obtain the benefits the audit should provide.
Briefly describe key features of the socio-economic environment in each of the following periods:(i) pre-1844(ii) 1844–1920s(iii) 1920s–1960s(iv) 1960s–1990s(v) 1990s–present
Outline the major audit objectives in each of the following periods:(i) pre–1844(ii) 1844–1920s(iii) 1920s–1960s(iv) 1960s–1990s(v) 1990s–present
Explain briefly how auditing techniques have been affected by:(i) growth in the size of companies(ii) changes in technology.
Explain briefly the significance of the Joint Stock Companies Act 1844 to the development of auditing.
The Companies Act 1900 has been referred to as “a prominent milestone in the history of company auditing”. List reasons which help to explain why this Act has been given this title.
Explain briefly the importance of the following cases to the development of auditors’ responsibilities:(i) Re London and General Bank (No. 2) [1895];(ii) Re Kingston Cotton Mill Co. Ltd (No. 2)
“Changes in auditing reflect, and represent a response to, changes in the socio-economic environment.” Using an example to illustrate your answer, explain briefly the link between changes in
Outline key differences between the audit risk and business risk approaches to auditing.
Explain briefly why auditing firms have tended to return to the audit risk approach since 2002.
Outline the key legislative and regulatory changes that have affected auditing since 2002.
State the social purpose of auditing and explain how this relates to the postulates and concepts of auditing.
(a) Explain briefly what is meant by a ‘postulate’.(b) List four postulates of auditing.
Define and explain the importance of the concept of ‘independence’ as it relates to auditing. (Your definition should refer to both independence in mind and independence in appearance.)
Explain briefly the meaning and importance to auditing of the concept of competence.
Explain briefly the meaning and importance to auditing of the concept of evidence.
Explain briefly the meaning and importance to auditing of the concept of materiality.
Explain briefly the meaning and importance to auditing of the concept of audit risk.
Explain briefly the meaning and importance to auditing of the concept of scepticism.
(a) Explain briefly the importance to the concept of reporting of:(i) the adequacy of reporting; and(ii) successful communication.(b) Identify two important differences between auditors’ reports
Explain briefly the meaning and importance to auditing of the concept of due care.
Explain briefly the importance of auditors being independent both in fact (or of mind) and in appearance.
Identify, and provide examples to illustrate, six ‘threats’ to auditors’ independence.
Explain briefly three general safeguards that audit firms and/or audit engagement partners are required to apply to help protect the auditor’s independence.
(a) Identify seven circumstances that present a threat to auditors’independence.(b) For each circumstance, outline one safeguard that might prevent auditors’ independence from being compromised.
(a) Identify two forms of ‘mandatory rotation of auditors’.(b) Outline five arguments in favour and five arguments against mandatory auditor rotation.(c) Outline the auditor rotation requirements
List seven non-audit services the Sarbanes-Oxley Act of 2002 prohibits auditors from providing to audit clients which are SEC registrants.
List seven services which the APB’s Ethical Standard 5 prohibits auditors in the UK from providing to their audit clients.
(a) Explain briefly how auditors’ independence might be strengthened if they were appointed by:(i) the State or a State agency, or(ii) a shareholder or stakeholder panel.(b) For each of (i) and
Explain briefly:(i) what is meant by ‘an audit committee’(ii) the usual composition of audit committees in UK public listed companies.
Explain briefly two ways in which an audit committee can help to strengthen the independence of the company’s auditor.
State the institutions which define the responsibilities of auditors and the particular part played by each.
List the financial and governance reports the directors of a listed company are required to include in their company’s annual report.
Explain the responsibilities of a company’s:(i) Directors, and(ii) Auditor, with respect to the company’s financial statements.
State the criteria to be met by:(i) An individual, and(ii) A firm, in order to be appointed as the auditor of a company.
List those parties who may:(i) Appoint the auditor,(ii) Remove the auditor from office, and the circumstances in which these parties can exercise their rights.
Explain the legal relationship between the auditor and (i) The client company and (ii) Its shareholders.
State the fundamental standard of work required of auditors in the performance of their duties as laid down in case law [in particular, in the Kingston Cotton Mill case (1896)].
Explain briefly:(i) The purpose of Auditing Standards and the benefits they provide for(a) Auditors.(b) Financial statement users and(c) The auditing profession.(ii) How Auditing Standards differ
Explain briefly the responsibilities of auditors in respect of the following governance reports of companies:(a) The strategic and directors’ reports.(b) The going concern statement.(c) The
(a) Briefly explain what is meant by:(i) A Transparency Report.(ii) The Audit Firm Governance Code.(b) Identify which audit firms must:(i) Publish a Transparency Report.(ii) Comply with the Audit
Explain briefly the two types of fraud which are particularly relevant to auditors.
The importance of detecting fraud as an audit objective has changed markedly over the period from 1844 to the present time. State the significance of fraud detection as an audit objective in each of
Explain the factors that constitute ‘the fraud triangle’.
In the context of detecting fraud, explain the purpose of a discussion among audit engagement team members.
Giving examples to illustrate your answer, explain what is meant by ‘a fraud risk factor’ and the role of such factors in auditors’ detection of fraud.
Outline the procedures auditors may perform:(i) To assess the risk of the financial statements being materially misstated as a result of fraud.(ii) To respond to the possibility of the financial
Explain briefly the circumstances in which auditors seek evidence of auditees’:(i) Compliance with applicable laws and regulations.(ii) Non-compliance with applicable laws and regulations.
Describe briefly the procedures auditors may perform to detect noncompliance with laws and regulations.
Explain the meaning of the phrase ‘auditors’ duty of confidentiality to their clients’.
Outline auditors’ responsibility to report detected or suspected instances of fraud or non-compliance with other laws and/or regulations to:(i) The auditee’s management.(ii) The auditee’s
Identify the major steps in the audit process.
Briefly explain the objective of:(i) Compliance procedures, and(ii) Substantive procedures.For each of these objectives give one example of an audit procedure which is designed to meet that objective.
State whether you agree or disagree with the following statement. Briefly explain your answer. Gathering evidence in accordance with ISAs requires the auditor to obtain the strongest possible
Outline the requirements of audit engagement partners with respect to:(i) Assigning.(ii) Directing.(iii) Supervising, and(iv) Reviewing the work of engagement team members.
Briefly explain the responsibilities of the audit engagement partner when relying on the work of experts to perform part of an audit.
(a) Define ‘audit documentation.(b) List five specific purposes of audit documentation.
(a) Distinguish between information contained in:(i) The permanent audit file, and(ii) The current audit files.(b) Provide two examples of the information contained in each of the above files.
Briefly explain the key concerns of:(i) A senior member of the engagement team when reviewing the work of a more junior member of the team.(ii) The audit engagement partner when reviewing the
(a) Define the term: ‘engagement quality control review.(b) Explain who may be an engagement quality control reviewer.(c) Briefly explain how an engagement quality control review is conducted.
Outline the requirements of audit firms regarding:(i) Assembling the final audit file and subsequent modifications or additions thereto, and(ii) Retention, ownership and custody of audit
List three matters the auditor must carefully evaluate before accepting an audit engagement.
Explain briefly why it is necessary for an auditor to investigate the integrity of a (prospective) client’s management before accepting an audit engagement.
Explain briefly the factors auditors should consider before concluding they are competent to accept a particular audit engagement.
(a) Explain briefly the purpose of a proposed auditor communicating with the predecessor auditor; and(b) List three matters about which the proposed auditor should seek information.
(a) Explain briefly the purpose of audit engagement letters; and(b) List five items which are almost invariably included in such letters.
Explain briefly the importance of an auditor gaining a thorough understanding of the client, its business operations, its risks, its industry, and its financial and non-financial performance.
List(a) Five external environmental factors and(b) Five internal environmental factors which are likely to affect an entity and its external audit.
Explain briefly the importance of each of the following as risk assessment procedures:(i) Touring the client’s premises.(ii) Reading trade journals and magazines.(iii) Reviewing the client’s
(a) Briefly explain the meaning of the term ‘analytical procedures’; and(b) outline three ways in which these procedures are used during an audit.
List four ways in which analytical procedures can assist the auditor during the initial (risk assessment) stage of an audit.
State the two main phases in planning an audit and outline the main objective(s) of each.
When planning an audit, the auditor must consider:(i) The extent of audit procedures.(ii) The timing of audit procedures.(iii) The nature of audit procedures.Briefly explain the meaning of each of
Define ‘materiality’ and explain briefly the distinction between planning materiality and tolerable error.
Explain briefly what is meant by ‘performance materiality’ and how it relates to planning materiality and tolerable error.
Describe briefly the three steps in setting planning materiality.
Explain briefly how setting materiality limits at different levels affects planned audit procedures.
Explain briefly what is meant by ‘the auditor’s desired level of audit risk’ and how it relates to the auditor’s desired level of assurance.
Explain briefly the circumstances in which the auditor’s desired level of audit risk is likely to be particularly low.
Explain briefly how the auditor’s assessment of inherent risk and internal control risk affects the planning of substantive procedures.
Explain briefly the relationship between materiality limits, audit risk and audit planning.
Explain briefly what is meant by ‘an accounting system’.
Explain briefly why a client’s accounting system is divided into subsystems (or audit segments) for audit purposes. State two bases on which this sub-division may be based.
Explain briefly the meaning of each of the following terms:(i) Internal control system.(ii) Control environment.(iii) Risk assessment process.(iv) Control activities.(v) Monitoring of controls.(vi)
Outline the seven characteristics of a good system of internal accounting controls.
Describe briefly two procedures which are used to document auditees’ accounting sub-systems.
Explain briefly the purpose of a ‘walk through test’ and how it is conducted.
In relation to internal controls, define:(i) A strength.(ii) A deficiency.
List five examples of inherent limitations of internal control systems.
(a) Explain briefly the purpose of ‘compliance procedures’.(b) Give two examples of compliance procedures and link each to the audit objective it is designed to test.
Describe briefly what is meant by ‘an audit plan’ and how and when it is prepared.

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