Describe what analytical procedures do and three ways they can be used. - answer✔They compare
balances with previous periods, month by month, or with industry data/forecasts.
- Can be used to compare manual vs system generated journal.
- Can be used to compare journal entries year on year.
- Can be used to analyse margins and sales and highlight negative margins.
What are the limitations of analytical procedures (4)? - answer✔- require good knowledge of the
business.
- may be prone to performing analytics mechanically and lack of professional scepticism.
- reliable data for the analytic may not be available.
- lack of comparability if the business is growing or changing.
What is the purpose of walkthroughs? - answer✔- they are designed to establish that internal controls
exist.
- for the audit team to gain an understanding of the control.
- they help to decide the audit approach, whether controls can be relied upon.
- they cannot be used as audit evidence.
What is the purpose of tests of controls (3)? - answer✔- they are designed to obtain sufficient audit
evidence of operating effectiveness.
- the auditor is to rely on controls when determining extent of substantive procedures.
- substantive procedures alone are not sufficient audit evidence.
What is the third party test? - answer✔when considering whether the requirements of the ethical
standard have been met, evaluation should be made with reference to the perspective of an objective,
reasonable and informed third party.
Name 5 criticisms of external auditors. - answer✔- lack of audit quality/scepticism.
- lack of competition due to dominance of big four.
What type of actions/transactions indicate money laundering and what steps should be taken if this
issue arises? - answer✔- large periodic transactions of the same amount, being billed to and from
overseas locations.
- report to money laundering officer at the firm as activity represents proceeds of crime.
- report to the national crime agency as it is an offence not to report.
- avoid tipping off the client as it would be a criminal offence to do so.
How should a question which suggest an ethical dilemma/situation be answered? - answer✔- first
explain what the question presents (e.g. conflict of interest, overdue fees, opinion shopping, long
association).
- then discuss the ethical threats that will arise from the situation (e.g. management threat, advocacy,
familiarity, self-interest etc.).
- then discuss any safeguards that could be applied to these threats.
- then come to conclusion.
What are the safeguards to management threat? - answer✔- have an informed management (with
knowledge of area so can evaluate advice given by auditor instead of just taking opinion as gospel, and
there auditor effectively making the decision).
- only perform work of a technical/mechanical nature only (not judgemental).
What are PIE clients? - answer✔- an issuer whose transferable securities are admitted to trading on a UK
regulated market.
- a credit institution.
- a person who would be an insurance undertaking.
If warranties have been deemed a risky area in the audit, how could they be tested (5 ways). - answer✔·
Enquire with management about the basis for the estimate of the warranty provision
· Compare prior year provisions with actual claims made to ascertain the accuracy of managements
estimates
· Review the level of returns post year end and compare this with the assumptions made about returns
· Review listing of repair costs incurred and compare this with the assumptions made
· Check the movement in the provision has been appropriately recorded in the statement of profit or
loss
If going concern has been deemed a risky area in the audit, how could they be tested (5 ways). -
answer✔· Obtain cash flow forecast for at least a year from the reporting date and assess
reasonableness
· Perform sensitivity analysis on key components of forecast such as revenue, interest rates
· Review cash flow forecast to determine whether entity can pay debts and will comply with bank
covenants
· Obtain written representations from management regarding future plans and their feasibility
· Inspect bank correspondence for evidence of banking relationship including covenants
If management override of controls has deemed to be very high risk, how could this be tested? (5 ways)
- answer✔· Substantiate journal entries and investigate reconciling items
· Review significant accounting estimates and judgement for bias
· Investigate transactions outside of the ordinary course of business
· Review whistle-blowing arrangements
· Review internal auditor's report
If revenue has been deemed a high risk area, how can this be tested? (5 ways) - answer✔· Ascertain and
test controls over revenue recognition
· Agree contract price to revenue recognised for a sample of contracts
· Trace receipt of contract price to deferred income
· Agree cash receipt to bank
· Recalculate revenue to be recognised in the current year by pro-rating
· Trace transfer from deferred revenue to revenue
How can intangibles - development costs be tested? (5 ways) - answer✔· Obtain a schedule of costs
included to consider whether they meet capitalisation criteria
· Agree costs to invoices to determine whether capitalisation is appropriate
· Ascertain from management the basis for determining the useful life and consider the reasonableness
· Recalculate amortisation for a sample of intangibles and agree this to the amortisation charge
Inspect managements impairment review
How can PPE be tested? (6 ways) - answer✔· For additions agree amounts to purchase invoices
· For additions reperform foreign currency translation using a rate from a reliable independent source
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