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  1. Assurance engagement is… Assurance is …term than Audit

    • an engagement in which a (1) practitioner (2) expresses a conclusion designed to enhance the degree of confidence of the (1) intended users other than the (1) responsible party about the (3) outcome of the evaluation or measurement of (4) a subject matter (identifiable, capable of consistent evaluation or measurement) against (5) criteria .;
    • a more inclusive

  2. 4 types of assurance and elaborate

    • Absolute assurance
    • Reasonable assurance engagement: e.g. Audit, Conclusion is expressed in the positive form
    • Limited assurance engagement: Review, Conclusion is expressed in the negative form
    • No Assurance (agreed-upon procedures)

  3. 2 Types of Tests in Audit

    • Test of Details : Correctness of data
    • Analytical Test / Reasonableness Test: Reasonableness of observation

  4. The overall objectives of an audit of financial statements

    • To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework
    • To report on the financial statement in accordance with the auditor’s findings

  5. Auditing is a… approach of objectively evaluating the evidence accumulated; it is an …process

    Systematic; iterative

  6. different phases of an audit of financial statements

    • Acceptance of audit engagement
    • Planning
    • Testing of internal controls
    • Testing of transactions and balances
    • Final review and audit completion
    • Reporting

  7. Acceptance of audit engagement

    • • Nature of services and responsibilities of engagements
    • • The client’s business nature
    • • The integrity of the management
    • • Independence
    • • Competence

  8. Planning
    • Understand the of the client’s business and accounting process

    • Establish the overall audit strategy and work to be performed
  9. Testing of internal controls

    • • Better internal controls -> less detail testing
    • • Testing the effectiveness of the internal control and if the system is implemented well

  10. Testing of transactions and balances

    • • Testing whether the transaction are properly recorded and the account balances are properly presented
    • • (Did they do the proper JE with proper accounts)

  11. Final review and audit completion

    • Have you obtained sufficient and appropriate audit evidence

  12. Auditor’s relationship with the company

    • External audit (or statutory audit)
    • Internal audit
    • Government audit

  13. Government audit: conducted by whom and 2 type of audits

    • • Audit Commission
    • • Value-for-money audit (2 reports / year)
    • • Regularity audit (Financial statements)

  14. Nature of auditor’s work

    • Financial statements audit
    • Operational audit (or value for money audit)
    • Compliance audit

  15. Operational audit (or value for money audit)

    Review of the efficiency (if the output is maximized with the given input) and effectiveness (if the organization meets its objective) of the operating procedures of an organization and improving its operations

  16. Compliance audit

    Review of whether pre-set procedures, rules and regulations are properly complied with

  17. an agency relationship arises in situation where…; shareholder =…, managers =…)

    principals, hire agents, to perform some services and making some decision on behalf of the principal ; principal; agent

  18. Goal inconsistency / Conflict of interest – 3 examples

    • shareholders aim for profit maximization, managers aim for personal benefit and enjoyment, at the expense of shareholders wealth
    • M&A (empire building, may not necessarily be utilizing some synergy effects)
    • Avoidance of optimal risk position and bypass profitable opportunities to play safe (Very risk adverse)

  19. Agency theory suggests that …

    managers will seek to maximise their own benefits at the expense of company’s shareholders

  20. 2 Measures to rectify agency problem+limitations; problem of …may arise, especially for big corporations ; There is …problem where agents …because it may not be feasible for shareholders to monitor all managerial actions

    • Impose Restrictions to actions of managers
    • Enforce punishments when things go wrong
    • effective only if shareholders can keep watch all of the actions taken by managers
    • information of asymmetry
    • moral hazard; take unobserved actions in their own self-interests

  21. To reduce the moral hazard problem, shareholders must incur agency costs for …+example

    • alignment of interests
    • Managers may then attempt to inflate the earnings and maximizing the bonus and share options they receive
    • To solve the problem, bring in auditors to check the financial statements prepared by the management

  22. Demands for auditing from agency theory’s perspective -4 points

    • separation of ownership and management
    • Agency risk
    • Bias of the information provider
    • Insurance against risk

  23. Doing an audit is like buying an insurance –elab

    can sue the auditor and compensation will come from professional indemnity insurance

  24. 3 Causes of information risk
    • Accessibility of information (Cannot access the underlying data)
    • Conflicting interests or goal inconsistencies between information provider and information users
    • Complex and voluminous of information
  25. Information risk is the risk that
    the financial statements distributed by a company will be materially false and misleading
  26. Ways to reduce information risk
    User verifies information

    Users share information risk with management

    Assurance services to enhance intended user’s confidence
  27. Ways to reduce information risk - User verifies information – why impractical

    • • Most users are not expert
    • • User does not have the right of access to the underlying data
    • • For international investors, they are not likely to go overseas to check the data

  28. Ways to reduce information risk – users share information risk with management - Why Useless?

    - the management may disappear and may not have money to pay the damages

  29. Advantages of Auditing

    • Reducing information risks
    • Enhancing credibility of financial information (management is also one intended user)
    • Ensuring that management performs its stewardship function (using their assets in proper manner)
    • Reducing agency risks
    • Providing reliable information for the participants of capital market

  30. Limitations of Auditing

    • Nature of financial reporting
    • Accessibility of audit evidence
    • Time limit to complete an audit at a reasonable cost
    • Variation in the judgment about sufficient and appropriate audit evidence

  31. Limitations of Auditing - Nature of financial reporting

    involve subjective judgments – applying accounting standards and making accounting estimates

  32. Limitations of Auditing - Accessibility of audit evidence

    auditor could not get all the audit evidence required, e.g. lost or destroyed, management refuse to give information to auditors, concealed fraud

  33. Limitations of Auditing - Time limit to complete an audit at a reasonable cost

    • internal controls policy =/= implementation
    • Audit is on a testing basis; not conclusive (not testing everything)
    • Evidence is persuasive, not conclusive

  34. The objectives of the auditor to prepare the auditor’s report are

    • To form an opinion on the financial statements based on an evaluation of the conclusions drawn from the audit evidence obtained
    • To express clearly that opinion through a written report that also describes the basis for that opinion

  35. Content of main body of Auditors’ Report

    • Introductory paragraph
    • Description of management’s responsibility
    • Description of auditor’s responsibility
    • Opinion paragraph

  36. Meaning of True and Fair View : No definition in the …or…; …suggests that financial statements will normally convey a true and fair view if the presentation of which is based on the application of…(2 points)

    • Companies Ordinance ; Conceptual Framework for Financial Reporting; HKAS 1;
    • The principal qualitative characteristics +The appropriate financial reporting standards

  37. The principal qualitative characteristics

    faithful representation, relevant, reliable, comparable, understandability

  38. what are The appropriate financial reporting standards
    Application of HKFRSs

    Selection and application of appropriate accounting policies

    Additional disclosures
Card Set
4510 - 1
4510 - 1