AAT Level 4 Audit and Assurance flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Reasonable assurance

A high but not absolute level of assurance that the financial statements are free from material misstatement, limited by sampling risk, judgement and the inherent limitations of controls.

Three-party assurance relationship

The practitioner, the responsible party who prepares the subject matter, and the intended users to whom the assurance report is addressed form the core structure of an assurance engagement.

Limited assurance

A lower level of assurance expressed negatively, typically in a review engagement, based mainly on inquiry and analytical procedures rather than detailed substantive testing.

Statutory audit exemption

A relief allowing certain small companies meeting specified size thresholds to omit a statutory audit, subject to conditions such as shareholder consent or public interest exclusions.

Auditor's report addressee

The report is addressed to the members or shareholders, reflecting directors' accountability to owners, not to management or the entity itself.

Integrity principle

The ethical requirement to be straightforward and honest in all professional and business relationships, including the audit report and dealings with clients and regulators.

Self-interest threat

A threat arising where a financial or other interest of the auditor, such as a fee dependency, shareholding or loan, inappropriately influences judgement or behaviour.

Self-review threat

A threat arising where the auditor evaluates or relies on work previously performed by the same firm, such as preparing records that are later audited.

Independence in appearance

The avoidance of facts and circumstances so significant that a reasonable and informed third party would conclude the auditor's objectivity is compromised.

Contingent fee prohibition

Audit and assurance fees cannot be calculated on a contingent basis because the auditor's financial interest in the outcome creates an unacceptable self-interest threat.

Audit risk model

Audit risk equals inherent risk multiplied by control risk multiplied by detection risk; detection risk is managed by varying the nature, timing and extent of procedures.

Significant risk

An identified risk of material misstatement assessed close to the upper end of the spectrum, requiring specific audit consideration and often substantive procedures rather than reliance on controls.

Performance materiality

An amount set below overall materiality to reduce to an acceptably low level the probability that aggregate uncorrected and undetected misstatements exceed overall materiality.

Completeness assertion

The assertion that all transactions, assets and liabilities that should have been recorded have been recorded, tested by tracing from source documents to the accounting records.

Audit strategy versus plan

The strategy sets overall scope, timing, direction and reporting; the plan translates it into detailed nature, timing and extent of procedures for each area.

COSO control components

Control environment, risk assessment, control activities, information and communication, and monitoring activities together describe the structure of an entity's internal control system.

Walk-through test

Tracing one or a few transactions through the accounting system to confirm the auditor's understanding of the design of controls, not to test operating effectiveness.

Segregation of duties

Separating authorisation, custody of assets, recording and reconciliation among different people to reduce the risk of error or fraud going undetected.

Test of control

A procedure assessing whether a control operated effectively throughout the period, supporting a lower assessed control risk and reduced substantive testing.

Internal control questionnaire

A documented list of questions about the presence and design of controls in a system, completed by the auditor to record understanding and identify control weaknesses.

Sufficient appropriate evidence

The quantity and quality of audit evidence needed to support conclusions; appropriateness covers relevance and reliability, sufficiency covers quantity.

Vouching versus tracing

Vouching from records to supporting documents tests existence or occurrence; tracing from source documents to records tests completeness.

External confirmation

Direct written response from a third party, such as a bank or customer, providing reliable evidence about balances or transactions; non-responses require alternative procedures.

Cut-off testing

Examining transactions shortly before and after the reporting date to confirm they are recorded in the correct accounting period, addressing occurrence and completeness.

Subsequent events review

Procedures performed after the reporting date to identify adjusting events providing evidence of conditions at that date and non-adjusting events requiring disclosure.

Qualified opinion

An opinion stating the financial statements are materially misstated or sufficient evidence could not be obtained, and the effect is material but not pervasive.

Disclaimer of opinion

An opinion issued where the auditor cannot obtain sufficient appropriate evidence and the possible effects are material and pervasive, so no opinion can be expressed.

Written representations

A letter from management confirming matters for which other evidence is limited; it supports but never replaces other audit evidence the auditor could obtain.

Key audit matters

Matters of most significance in the audit, selected from those communicated with those charged with governance, and described in the auditor's report for listed entities.

Value for money three Es

Economy is acquiring inputs at least cost, efficiency is maximising outputs from given inputs, and effectiveness is achieving intended objectives and outcomes.

Internal audit function

An independent, objective assurance and consulting activity within an entity that evaluates and improves risk management, control and governance processes.

Agreed-upon procedures

An engagement where the practitioner performs specified procedures and reports factual findings only, giving no assurance, with the report restricted to the named parties.