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principles of external auditing

Questions and Answers of Principles Of External Auditing

State the overall audit objective of substantive testing.
Explain briefly why some substantive testing is required in every audit engagement.
Explain the meaning of the term ‘assertion’ and list four assertions about classes of transactions and four relating to account balances.
Explain briefly two ways in which substantive analytical procedures may be used as substantive tests.
(a) Explain briefly two ways in which the details of account balances may be tested; and(b) For each of these ways, explain the circumstances in which its use is particularly appropriate.
(a) Describe briefly how the following audit procedures are performed:(i) Tracing forwards(ii) Tracing backwards.(b) Using a specific example to illustrate your answer, explain the purpose of each of
Explain briefly the procedures the auditor may use to test the specific audit objectives:(i) Does the inventory exist?(ii) Is the inventory owned by the client?
In relation to auditing accounts receivable, distinguish between a positive and a negative confirmation request.
(a) List five elements of the process of confirming accounts receivable which must remain under the auditor’s control.(b) Explain briefly why it is important that the auditee is not permitted to
Explain briefly the responsibilities of an ‘incoming auditor’ (following a change of auditor) in respect of the ‘opening balances’ in the current period’s financial statements.
Explain briefly what is meant by ‘audit sampling’.
In relation to audit sampling, explain briefly what is meant by:(i) Sampling risk (and levels of assurance).(ii) Stratification.(iii) Precision limits.(iv) Tolerable error.
Distinguish between judgmental sampling and statistical sampling and list two advantages and two disadvantages of each approach.
Explain briefly the essential difference between attributes sampling and variables sampling.
State the characteristic feature of random sample selection and list three variations of random sample selection.
Distinguish between:(i) Haphazard sample selection, and(ii) Judgmental sample selection.
Explain briefly why probability proportional to size (PPS or monetary unit) sampling can be referred to as a hybrid of attributes and variables sampling.
With reference to CAATs, explain briefly:(i) The test data technique.(ii) Three types of audit software.
List five ways in which CAATs may assist the auditor during an audit engagement.
Identify, and explain briefly, two pitfalls or difficulties of which auditors should be aware when planning to use CAATs during an audit engagement.
Define(a) Contingent liabilities and(b) Commitments and explain briefly why contingent liabilities and commitments may present problems for the auditor.
List five procedures auditors commonly use during their review for contingent liabilities and commitments.
(a) Briefly distinguish between (i) adjusting and (ii) non-adjusting subsequent events.(b) Give one specific example to illustrate each of these types of subsequent events.
(a) State the period which is subject to the auditor’s review for subsequent events.(b) List three procedures auditors commonly use during their review for subsequent events.
Explain briefly what is meant by the going concern assumption.
Explain briefly the auditor’s responsibility for assessing the propriety of the auditee adopting the going concern assumption during:(i) The ‘risk assessment’ phase of the audit.(ii) The
Explain briefly what is meant by written representations and outline five matters for which auditors are required to obtain such representations.
List four objectives of the audit engagement partner’s final review of the audit documentation.
Explain briefly the purpose of an engagement quality control review and how it is conducted.
Explain the significance of dating the audit report
List the elements the Companies Act 2006 requires auditors to refer to in their audit reports.
The auditor of a company is required to form and express an opinion on the truth and fairness of the company’s financial statements. Explain briefly:(i) The meaning frequently given to the phrase
Describe briefly the format of the standard audit report currently in use in the United Kingdom (as required by ISA (UK and Ireland) 700 (FRC, 2013b) and how it differs from the standard audit report
State the criteria which need to be met before the auditor may express an unmodified audit opinion.
List three types of modified audit opinion and briefly explain the circumstances in which each is appropriate.
Explain briefly the difference between an ‘Emphasis of Matter’ paragraph and an ‘Other Matter’ paragraph.
Explain briefly:(a) The ways in which the expanded (or long form) audit report differs from its short form predecessor.(b) The advantages and disadvantages of each of these forms of audit report.
Discuss briefly the advantages and disadvantages of a standard form of audit report compared with a free-flow form of report;
Explain briefly the purpose, form and timing of auditors’ communications of significant audit matters to those charged with auditees’governance.
Outline the matters to be included in auditors’ communications with those charged with auditees’ governance.
Distinguish briefly between a breach of auditors’ statutory duties and a breach of their common law duties.
Distinguish briefly between auditors’ contractual liability and their liability to third parties.
List the three facts a plaintiff must prove before a court will award damages against an auditor for negligence.
Explain the position adopted in the case of Ultramares v Touche (1931) with respect to auditors’ liability to third parties. What reason did the judge give for his decision in this case?
Explain briefly the significance of the decision in Hedley Byrne & Co. Ltd v Heller and Partners (1963) to the development of auditors’ liability to third parties.
Explain briefly the position adopted in the cases of Jeb Fasteners (1981) and Twomax Ltd (1983) with respect to auditors’ liability to third parties.
Explain briefly the principles enunciated in the Caparo decision (1990) with respect to the parties to whom auditors are liable.
Identify the parties to whom auditors may be held to owe a duty of care as a result of the Coulthard, Siddell, BCCI, Barings and Independent Advantage cases.
Briefly state the general principle that may be distilled from the post- Caparo cases reported in this chapter which the courts appear to seek to apply in cases involving auditors’ breach of their
Explain briefly the impact of out-of-court settlements on:(i) The development of the law as it relates to auditors’ liability.(ii) Auditors’ professional indemnity insurance.(iii) The reputation
. List six elements of a good system of quality control for audit firms.
List six specific quality control responsibilities of audit engagement partners.
Explain briefly the rationale underlying the introduction of mechanisms designed to monitor auditors’ performance.
Outline the key features of the general process of monitoring auditors’ performance.
. Evaluate briefly the effectiveness of monitoring auditors’ performance in the United Kingdom.
Given that systems of quality control have been established in audit firms and that auditors’ performance is monitored by the RSBs, audit failures should be a thing of the past.Explain briefly:(a)
List two advantages and two disadvantages of audit firms forming:(a) Limited liability companies (LLCs).(b) Limited liability partnerships (LLPs).
Outline the criteria that must be met in order for a liability limitation agreement between a company and its auditor to be effective.
List two advantages and two disadvantages of the introduction of:(a) A ‘cap’ on auditors’ liability, and(b) Contributory negligence (proportional liability) as a means of limiting auditors’
Evaluate the relative effectiveness of the five means of limiting auditors’ liability discussed in this chapter.
Distinguish between:(a) An environmental report and a corporate responsibility report.(b) A ‘reasonable assurance’ engagement and a ‘limited assurance’ engagement.
Explain briefly three motivations for companies to engage in corporate responsibility reporting.
Outline the principles identified in the Global Reporting Initiative’s Sustainability Reporting Guidelines (G3.1) that define the content of corporate responsibility reports.
Outline the principles identified in the Global Reporting Initiative’s Sustainability Reporting Guidelines (G3.1) that define the quality of the information provided.
(a) Identify the main professional groups who assure companies’ corporate responsibility reports.(b) Outline the professional requirements for assurance providers and assurance practitioners.
Outline the three principles that underpin assurance engagements conducted in accordance with Accountability’s AA1000AS (2008).
Outline the content of an assurance statement.
Briefly explain two factors which may motivate companies to have their corporate responsibility reports independently assured.
Briefly explain three factors that may deter companies from publishing independently assured corporate responsibility reports.
Briefly explain four ways in which corporate responsibility issues may impact the statutory audit of companies’ financial statements.
(a) Define the audit expectation-performance gap and briefly describe its structure.(b) Explain why the audit expectation-performance gap is of concern to the auditing profession.
Explain briefly changes in the audit expectation-performance gap in the United Kingdom between 1999 and 2008 and provide reasons for these changes.
Outline the four-stage process of change in the audit expectationperformance gap identified as an outcome of reviewing changes in the gap in New Zealand and the UK between 1989 and 2008.
Identify four adverse consequences of the Big Four firms’ dominance in the large company audit market.
Outline changes to the standard auditor’s report proposed in the wake of the global financial crises and provide reasons for the proposed changes.
(a) Distinguish between mandatory audit firm rotation and mandatory tendering.(b) Explain what is meant by an ‘open book’ approach to tendering and outline the advantages of this approach for
(a) Briefly explain what is meant by a ‘joint audit’;(b) Outline three advantages and three disadvantages of joint audits.
Explain briefly two reforms proposed to assist mid-tier audit firms compete with the Big Four firms in the large company audit market.
Explain briefly recent developments in auditing in China which may make proposals to reduce the Big Four firms’ dominance in the large company audit market redundant.
Identify two inherent conflicts in the current audit model and explain:(a) Why these conflicts threaten the future of the audit function.(b) How they might be resolved.

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