Principles of Auditing flashcards

The systematic, independent examination of an entity's financial statements and underlying records, to form and express an opinion on whether they give a true and fair view. It gives reasonable, not absolute, assurance.

Self-interest: a financial interest in the client, a significant fee dependency or a loan. Self-review: auditing work the firm did itself, such as a valuation or bookkeeping. Advocacy: promoting the client's position, such as acting for it in litigation. Familiarity: long association or a close personal relationship. Intimidation: pressure on the team, such as a threat to replace the firm.

Audit risk = Inherent risk x Control risk x Detection risk. The auditor controls detection risk, through the nature, timing and extent of the procedures performed. Where inherent and control risk are high, detection risk must be set lower by doing more, or more reliable, substantive procedures.

Materiality is set for the financial statements as a whole, at a level below which a misstatement would not influence the decisions of users. Performance materiality is a lower figure used to design procedures, so that individually immaterial misstatements do not add up to more than the overall figure.

From an independent source outside the entity, rather than from within it. Obtained directly by the auditor, rather than indirectly. Generated internally where the related controls are effective. Documentary rather than oral, and an original rather than a photocopy or scan.

Intent. An error is an unintentional mistake: a clerical slip, an oversight or a misapplied accounting policy. A fraud is an intentional act involving deception to obtain an unjust or illegal advantage. The auditor seeks the same reasonable assurance for both, but fraud is harder to detect because it is concealed.

Test data tests the controls inside the client's programs: the auditor submits valid and deliberately invalid items and compares the output with what it should be. Audit software tests the data itself: the auditor's own program re-performs calculations, selects samples, identifies exceptions and stratifies balances.

1. Is the issue a misstatement or a scope limitation? 2. Is its effect material only, or material and pervasive? Misstatement, material only: qualified. Misstatement, pervasive: adverse. Scope limitation, material only: qualified. Scope limitation, pervasive: disclaimer of opinion.

A right of access at all times to the company's accounting records and financial statements, in whatever form they are held. A right to require information and explanations from officers and employees, anyone holding or accountable for the records, and Kenyan subsidiaries, their officers, employees and auditors, past as well as present. A statement to the auditor that is misleading, false or deceptive in a material particular is an offence.

Classes of transactions: occurrence, completeness, accuracy, cut-off and classification. Account balances: existence, rights and obligations, completeness, and valuation and allocation. Every audit procedure should be traceable to one of them.

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