ICAP CA Audit and Assurance Syllabus

Define materiality in the context of an audit.

Information is material if its omission or misstatement could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements; it has both quantitative (size) and qualitative (nature) aspects.

What is performance materiality?

An amount set lower than overall materiality, used to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality; applied to particular classes of transactions, balances or disclosures.

Give common benchmarks used to calculate overall materiality.

Typical ranges: about 5% of profit before tax, 0.5%-1% of revenue or total assets, or 1%-2% of gross profit / total assets. The benchmark chosen depends on the entity and users' focus.

What is the difference between the audit strategy and the audit plan (ISA 300)?

The overall audit strategy sets the scope, timing and direction of the audit and guides development of the plan. The audit plan is more detailed, setting out the nature, timing and extent of planned risk assessment, further audit procedures and other procedures.

State three benefits of adequate audit planning.

It helps devote appropriate attention to important areas; helps identify and resolve problems on a timely basis; helps proper organisation and management of the engagement; assists in selecting team members and directing/supervising them; and facilitates review.

What are the five components of internal control under the COSO/ISA 315 framework?

(1) The control environment; (2) the entity's risk assessment process; (3) the information system and communication; (4) control activities; (5) monitoring of controls.

List the main types of control activities.

Authorisation, performance reviews, information processing controls (application and general IT controls), physical controls (over assets and records), and segregation of duties.

What four functions should be segregated under segregation of duties?

Authorisation of transactions, execution/custody (handling assets), recording of transactions, and reconciliation/review. No one person should control more than one of these for a transaction.

What is a test of controls?

An audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.

When does an auditor perform tests of controls?

When the auditor intends to rely on the operating effectiveness of controls in determining the nature, timing and extent of substantive procedures, or when substantive procedures alone cannot provide sufficient appropriate audit evidence.

Name common methods used to test controls.

Inquiry combined with inspection, observation, re-performance, and inspection of documents/records evidencing the control (e.g. signatures, reviews); inquiry alone is not sufficient.

What is a control deficiency under ISA 265?

A deficiency exists when a control is designed, implemented or operated so that it is unable to prevent, or detect and correct, misstatements on a timely basis; or when a control necessary to do so is missing.

What is a 'significant deficiency' in internal control and to whom must it be reported?

A deficiency (or combination) that, in the auditor's professional judgement, is of sufficient importance to merit the attention of those charged with governance; it must be communicated to them in writing on a timely basis (and other deficiencies to management).

What does 'sufficient appropriate audit evidence' mean (ISA 500)?

Sufficiency is the measure of the quantity of evidence; appropriateness is the measure of its quality (relevance and reliability). Both are needed to support the audit opinion; more evidence is needed when risk is higher or quality is lower.

State the ISA 500 hierarchy of evidence reliability.

Evidence is more reliable when: obtained from independent external sources; generated internally under effective controls; obtained directly by the auditor; in documentary form (paper/electronic) rather than oral; and original rather than photocopies/facsimiles.

List the main procedures used to obtain audit evidence.

Inspection, observation, external confirmation, recalculation, re-performance, analytical procedures, and inquiry. (Mnemonic: AEIOU + RR / 'inspection, observation, inquiry, confirmation, recalculation, re-performance, analytical procedures'.)

What are the financial statement assertions about classes of transactions and events?

Occurrence, Completeness, Accuracy, Cut-off, and Classification (and Presentation).

What are the financial statement assertions about account balances at period end?

Existence, Rights and obligations, Completeness, and Valuation and allocation (plus accuracy/classification and presentation).

Which audit procedure provides the strongest evidence over the existence of a year-end receivables balance?

Direct external confirmation of balances from customers (positive confirmation), supplemented by review of after-date cash receipts.

How does an auditor obtain evidence over existence and condition of inventory?

By attending the physical inventory count, observing the count procedures, performing test counts (floor-to-sheet and sheet-to-floor), and reviewing for damaged/obsolete (slow-moving) items affecting valuation.

What is the key direction of testing to verify completeness vs occurrence?

For completeness, test from source documents/records forward to the ledger/financial statements. For occurrence/existence, test from the ledger/financial statements back to supporting documents.

What is audit sampling?

The application of audit procedures to less than 100% of items within a population such that all sampling units have a chance of selection, enabling the auditor to draw a conclusion about the entire population.

Distinguish statistical from non-statistical sampling.

Statistical sampling uses random selection and probability theory to measure and evaluate sampling risk quantitatively. Non-statistical sampling relies on the auditor's judgement to select the sample and evaluate results, without measuring sampling risk statistically.

Define sampling risk and non-sampling risk.

Sampling risk: the risk that the auditor's conclusion based on a sample differs from the conclusion if the whole population were tested. Non-sampling risk: the risk of a wrong conclusion for reasons unrelated to sample size (e.g. inappropriate procedures, misinterpretation, human error).

What is the objective of the auditor regarding subsequent events (ISA 560)?

To obtain sufficient appropriate evidence that events occurring between the period end and the date of the auditor's report that require adjustment of, or disclosure in, the financial statements are appropriately reflected.

What is the auditor's responsibility for events discovered between the date of the report and the issue of the financial statements?

The auditor has no obligation to perform procedures after the report date, but if a material fact comes to attention that would have affected the report, the auditor must discuss it with management, and if the FS are amended, perform procedures and re-date/extend the report.

What is the going concern basis of accounting?

The assumption that the entity will continue in operation for the foreseeable future (at least 12 months from the period end) and has neither the intention nor the need to liquidate or cease trading.

Give three indicators that may cast doubt on an entity's going concern status.

Financial: net liabilities, recurring losses, inability to pay creditors/loan defaults, adverse key ratios. Operating: loss of key management/market/supplier, labour difficulties. Other: pending litigation, non-compliance with regulations.

How is the audit opinion affected if a material going concern uncertainty exists but is adequately disclosed?

The auditor expresses an unmodified opinion but includes a separate 'Material Uncertainty Related to Going Concern' section in the report drawing attention to the disclosure.

What are written representations and why are they obtained (ISA 580)?

Written statements by management provided to the auditor confirming certain matters or supporting other evidence (e.g. that management has fulfilled its responsibilities and disclosed all relevant information). They are necessary audit evidence but are not sufficient on their own for the matters they cover.

What is the purpose of the overall review of the financial statements at the final stage of the audit?

To assess, using analytical procedures and overall evaluation, whether the financial statements as a whole are consistent with the auditor's understanding of the entity and give a true and fair view, and whether the accounting policies and disclosures are appropriate.

Under ISA 700, what must the auditor conclude before forming an opinion?

Whether reasonable assurance has been obtained that the financial statements as a whole are free from material misstatement, by evaluating whether sufficient appropriate evidence was obtained, uncorrected misstatements are immaterial, and the FS comply with the framework (including adequate disclosure).

What are the three types of modified audit opinion and the two reasons that cause them?

Types: Qualified, Adverse, and Disclaimer of opinion. Reasons: (1) the financial statements are materially misstated; or (2) inability to obtain sufficient appropriate audit evidence (scope limitation).

When is a qualified opinion ('except for') issued versus an adverse or disclaimer of opinion?

Qualified: misstatement or scope limitation is material but NOT pervasive. Adverse: misstatements are material AND pervasive. Disclaimer: inability to obtain evidence is material AND pervasive.

What is the difference between an Emphasis of Matter paragraph and a Key Audit Matters section?

Emphasis of Matter draws users' attention to a matter already appropriately presented/disclosed in the FS that is fundamental to understanding; it does not modify the opinion. Key Audit Matters (ISA 701) are matters of most significance in the current audit, selected from those communicated to those charged with governance, reported for listed entities.