ACCA Audit and Assurance question with complete solution rated A+ 2023
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Auditing and Assurance
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Auditing And Assurance
ACCA Audit and Assurance question with complete solution rated A+ 2023What is an assurance engagement? - correct answer An engagement in which a practitioner obtains sufficient appropriate evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users o...
ACCA Audit and Assurance question with complete solution rated A+ 2023
What is an assurance engagement? - correct answer An engagement in which a practitioner obtains sufficient appropriate evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria
[International Framework for Assurance Engagements, 7]
Elements of an Assurance Engagement - correct answer (1) Three party involvement:
Practitioner - the reviewer of the subject matter who provides the assurance
Intended users - the people using the subject matter to make economic decisions
Responsible party - the party responsible for preparing the subject matter
(2) Appropriate subject matter - The information subject to examination by the practitioner
(3) Suitable criteria - The criteria against which the subject matter is evaluated, i.e. standards, guidance, laws and regulations
(4) Sufficient appropriate evidence - needed to provide a basis for the opinion/conclusion
(5) Written assurance report - The output of the assurance engagement expressing a conclusion/opinion about the subject matter
[International Framework for Assurance Engagements, 20]
Reasonable assurance engagements - correct answer The practitioner:
Gathers sufficient appropriate evidence to be able to draw reasonable conclusions
- Performs very thorough procedures to obtain sufficient appropriate evidence including tests of controls
and substantive procedures
- Concludes that the subject matter conforms in all material respects with identified suitable criteria
- Gives a positively worded assurance opinion
- Gives a high level of assurance e.g. an audit report for a company Limited assurance engagements - correct answer The practitioner:
- Gathers sufficient appropriate
evidence to be able to draw limited conclusions
- Performs significantly fewer procedures, mainly enquiries and analytical procedures
- Concludes that the subject matter, with respect to identified suitable criteria, is plausible in the
circumstances
- Gives a negatively worded assurance conclusion - Gives a moderate or lower level of assurance than that of an audit
External audit engagements - correct answer An external audit is an example of a reasonable assurance engagement
ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing states the purpose of an external audit engagement is to 'enhance the degree of confidence of intended users in the financial statements
This is achieved by the auditor expressing an opinion on whether the financial statements:
- Give a true and fair view (or present fairly in all material respects)
- Are prepared, in all material respects, in accordance with an applicable financial reporting framework
[ISA 200, 3]
Objectives of the auditor - correct answer - Obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error
- Express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework
- Report on the financial statements, and communicate as required by ISAs, in accordance with the auditor's findings
[ISA 200, 11]
Benefits of an audit (HIRED) - correct answer - Higher quality information which is more reliable, improving the reputation of the market - Independent scrutiny and verification may be valuable to management
- Reduces the risk of management bias and fraud and error by acting as a deterrent. An audit may also detect bias, fraud and error
- Enhances the credibility of the financial statements, e.g. for tax authorities or lenders
- Deficiencies in the internal control system may be highlighted by the auditor
Limitations of an audit (FIRED) - correct answer - Financial statements include subjective estimates and other judgmental matters
- Internal controls may be relied on which have their own inherent limitations
- Representations from management may have to be relied upon as the only source of evidence in some areas
- Evidence is often persuasive not conclusive
- Do not test all transactions and balances. Auditors test on a sample basis
Review engagements - correct answer A review engagement is an example of a limited assurance engagement
The objective of a review of financial statements is to enable an auditor to state whether, on the basis of procedures, which do not provide all the evidence
required in an audit, anything has come to the auditor's attention that causes the auditor to believe that the financial statements are not prepared in accordance with the applicable financial reporting framework
Review engagements are:
- Voluntary
- Analytical procedures
- To make enquiries
- Negative (worded) assurance reports
Who needs an audit and why? - correct answer In most countries, companies are required by law to have
an audit Small or owner-managed companies are often exempt. This is because there is less value in an audit for these companies
Note that these exemptions often do not apply to companies in certain regulated sectors, e.g. financial services companies or companies listed on a stock
exchange
Reasons for exempting small companies from audit - correct answer - The owners and managers of the company are often the same people
- The advice and value which accountants can add to a small company is more likely to concern other services, such as accounting and tax
- The impact of misstatements in the financial statements of small companies is unlikely to be material to
the wider economy
- The audit fee and disruption of an audit are seen as too great a cost for any benefits the audit might bring
Who may act as auditor? - correct answer - A member of a Recognised Supervisory Body (RSB), e.g. ACCA, and allowed by the rules of that body to be an auditor or;
- Someone directly authorised by the state
Who may not act as auditor? - correct answer Excluded by law:
The law in most countries excludes those who manage or work for the company, and those who have business or personal connections with them from auditing that company
Excluded by the Code of Ethics: Auditors must also comply with a Code of Ethics. The Code of Ethics requires the auditor to consider any factors that would prevent them acting as auditor, such as independence, competence or issues regarding confidentiality
Who appoints the auditor? - correct answer Members (shareholders) - of the company appoint the auditor by voting them in
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