4510 - 3

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4510 - 3
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4510 - 3
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  1. Compliance with ethical requirements(3)+ elab

    • Parts A, B and C of the HKICPA Code of Ethics: QC requirements
    • Hong Kong Standard on Quality Control (HKSQC) 1: firm level
    • Hong Kong Standard on Auditing (HKSA) 220 (Clarified): engagement level

  2. Professional skepticism: Definition;

    • questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud
    • a critical assessment of audit evidence

  3. Professional skepticism: Details(4pts)

    • Questioning contradictory evidence
    • Considering reliability of evidence
    • Evaluating sufficiency and appropriateness of audit evidence
    • Take into account past experience of the honesty and integrity of management

  4. Professional judgment: definition

    The application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement

  5. Professional judgment: details(5pt)

    • Materiality and audit risk
    • Nature (AR -> confirmation or vouching), timing (when to observe stock take) and extent (how many samples) of audit procedures to be performed
    • Whether sufficient appropriate audit evidence has been obtained
    • Evaluating judgments in applying accounting standards and accounting estimates (reasonableness)
    • Draw conclusions based on evidence obtained

  6. Obtaining sufficient appropriate audit evidence - Sufficiency

    • The measure of the quantity of audit evidence
    • Affected by auditor’s assessment of the risks of assessment and quality of such evidence

  7. Obtaining sufficient appropriate audit evidence - Appropriateness

    • The measure of the quality of audit evidence
    • In terms of relevance and reliability of audit evidence

  8. two types of fraud:

    • Fraudulent financial reporting
    • Misappropriation of company assets

  9. Fraud risk factors

    • Incentive or pressure to commit fraud
    • Perceived opportunity to commit fraud
    • Rationalisation of the act

  10. Motives of Fraudulent financial reporting+ example*1

    • Meet market expectations
    • Maximise compensation
    • Obtain a bank loan
    • Tax consideration;
    • earnings management

  11. To fulfill the external auditor’s responsibilities in detecting material misstatements due to fraud, the auditor should:

    • Maintain professional skepticism
    • Discuss among members of the engagement team
    • Perform risk assessment procedures to identify and assess risk of material misstatement (RMM) due to fraud
    • Respond appropriately to fraud or suspected fraud identified during the audit

  12. Perform risk assessment procedures – 2 examples

    • Ask management and employee if they are aware of fraud
    • Assess unusual relationship and other relationship that indicate fraud risk factors are present

  13. Respond appropriately to fraud or suspected fraud identified during the audit

    • Get more senior auditors to do the work
    • Perform further audit procedures to address the risk

  14. Responsibilities regarding fraud

    • Evaluate whether sufficient and appropriate audit evidence regarding the assessed RMM due to fraud has been accumulated
    • Communicate to management and those charged with governance, where appropriate, about matters relating to the fraud on a timely basis
    • Document the significant decisions and RMM due to fraud and also the responses (including audit procedures performed) in response to such risks

  15. Corporate governance is…; beneficial to …

    the system by which corporations are directed and controlled; management and shareholders, as well as auditors

  16. Hong Kong Code of Corporate Governance Practices, issued by the ..., Addressed to ..., reference to other companies, principle: "...", Explanations are merely for disclosure,
    • Hong Kong Stock Exchange
    • listed companies
    • comply or explain
  17. Effective corporate governance mechanism helps to:

    • Ensure the strategic guidance of the company, the effective monitoring of management by the board and the board’s accountability to the company and the shareholders
    • Protect and facilitate the exercise of shareholders’ rights, ensure the equitable treatment of all shareholders and recognise the rights of stakeholders and promote transparent and efficient markets
    • Ensure the timely and accurate disclosure of important matters

  18. a good corporate governance system will ensure…(5pts)

    • Appropriate composition of directors with sufficient relevant experience (will ensure the directors are qualified)
    • Integrity is a fundamental requirement in choosing directors
    • There is appropriate level of independence
    • There is a code of conduct for employees to follow
    • The board of directors will have some committees to make important decisions

  19. The Code recommends the following committee to be set up in listed companies:

    • Audit Committee
    • Remuneration Committee
    • Nomination Committee

  20. Audit Committee is constituted as a Committee under....for the purpose of ....; Composition:
    the Board of Directors

    oversee the financial reporting and the internal control procedures of a company

    At lease three independent non-executive directors

    One member should have recent and relevant accounting and financial experience
  21. An effective audit committee has the following benefits (4pt)

    • Increase public confidence in the credibility of the company’s financial reports
    • Help directors to discharge their responsibilities
    • Strengthen the independent position of a company’s external auditor
    • Ensure the effectiveness of the internal audit function

  22. functions of the audit committee

    • Helps to ensure the quality of financial information of the company
    • Reviews internal controls
    • Enhances the effectiveness of the internal audit function
    • Promotes the independence of external auditors

  23. Nomination committee

    Recommends persons with appropriate capacity and high level of integrity to take up the position of senior management

  24. Remuneration committee

    Sets up rewarding schemes for senior management in order to ensure that they will have incentive to improve company’s performance but less temptation in earnings management

  25. The external auditors are required to communicate with those charged with governance on certain matters which are related to the audit of the financial statements, including:

    • To provide them with an overview of the planned scope and timing of the audit
    • To obtain from them information such as the nature of the entity and its environment, etc.
    • To promote effective two-way communication

  26. Persons charged with governance VS management

    • overseeing the strategic direction of the entity and obligations related to the accountability of the entity;
    • executive responsibility for the conduct of the entity’s operations

  27. Matters to be Communicated - Audit matters of governance interest (4pt)

    • – The auditor’s responsibilities in relation to the financial statement audit
    • – Planned scope and timing and other matters of the audit
    • – Significant findings from the audit
    • – Auditor independence

  28. Matters to be Communicated - Governance and internal control issues (4pt)

    • – The appropriate person(s) in the entity’s governance structure with whom to communicate
    • – The allocation of responsibilities between those charged with governance and management
    • – The entity’s internal control and its importance
    • – Significant deficiencies (missing/not working) in internal controls identified during the audit

  29. Matters to be Communicated - Identified and suspected fraud

    • – Communicate these matters to management of appropriate level
    • – Communicate these matters to those charged with governance, if the auditor suspects fraud involving management

  30. Matters to be Communicated - Identified and suspected non-compliance of laws and regulations

    • – Communicate these matters to those charged with governance and management (where appropriate), except that the matters are clearly inconsequential
    • – Communicate these matters to the next higher level of authority such as the audit committee, if the auditor suspects that management or those charged with governance are involved

  31. The HKICPA Code of Ethics – what are different parts about?

    • Part A: General Application of the Code
    • This Part includes the five fundamental principles (see Slide 6)
    • Part B: Professional Accountants in Public Practice
    • Part C: Professional Accountants in Business
    • Part D: Additional Ethical Requirements
    • Part E: Specialised Areas of Practice

  32. The Code requires that a …approach shall be applied by professional accountants to….(3pts)

    • conceptual framework;
    • – Identify threats to comply with the fundamental principles
    • – Evaluate the impact or significance of the threats identified
    • – Apply safeguards to minimise the threats to an acceptable level

  33. Five Fundamental Principles of the CoE

    • Integrity
    • Objectivity
    • Professional competence and due care
    • Confidentiality
    • Professional behavior

  34. Threats to Compliance with the FP (5pts)
    Self-interest threats

    Self-review threats

    Advocacy threats

    Familiarity threat

    Intimidation threats
  35. Safeguards to Minimise the Threats - created by the professional bodies, legislation or regulation (5)

    • Educational, training and experience requirements
    • Continuing professional development requirements
    • Professional standards
    • Professional or regulatory monitoring and disciplinary procedures
    • External review

  36. created by the employer - Firm-wide (3)

    • Documented policies and procedures about the compliance with the fundamental principles
    • Leadership of the firm that stresses the importance of compliance with the fundamental principles
    • Quality control policies and procedures implementation and monitoring

  37. created by the employer - Engagement-specific (3)
    Having a professional accountant who was not a member of the team to review the work performed

    Consulting an independent third party

    Rotation of senior assurance team personnel

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