Auditing and Assurance 1

Assignment one

1.  Client acceptance & continuance. (10 marks)

Client acceptance is the decision made by the audit firm to start preforming an audit of a
company in which it has not perform any audit in the past while client continuance is choice of
the audit firm whether to continue to audit an existing company or not.[ CITATION Inv19 \l
1033 ]

As part of their quality management, audit firms are expected to develop policy to examine
prospective customers and to acknowledge involvement and periodically monitor customers'
continuity. Customer acceptance and continuity policies and procedures are important because
an audit company would prefer to avoid involvement with a client that lacks honesty in its
management. The following are the seven steps to consumer acceptance & continuation:
[ CITATION Inv09 \l 1033 ]

Client related
1. Reputation and integrity
2. Level of risk
3. Expected audit fees
Firm-related
4. Code of ethics and conduct
5. Competence
6. Resources
Other
7. Professional etiquette letter

Example:

A customer with their ethical practices may produce unreliable financial reports or information
that the audit firm can use for its assurance engagement. The auditor may then take the risk of
releasing an incorrect report, hampering the credibility and viability of the firm, provided the
results of the firm was guided directly by the quality of the data supplied to them. Therefore,
this is why a good consumer acceptance and ongoing reviews are important as they provide
protections against possible harm from bad customers.[ CITATION Wik \l 1033 ]

2.  Audit planning (15 marks)

Audit planning is, in accordance with Audit and Assurance Standard 1, one of the fundamental
principles that govern an audit. The audit therefore states that an auditor should plan his work
so that an efficient and timely audit can be conducted efficiently. Plan plans should be
based upon the knowledge and understanding of the client’s business. Among other things,
plans should be made to cover:[ CITATION Wik \l 1033 ]
 a) Acquire knowledge of customer accounts, policies and procedures for internal control;
b) Establishing the anticipated level of internal control reliance;
c) The nature, timing and scope of the audit procedures to be performed to establish and
program
d) The work to be done shall be coordinated.

Example:
XYZ Company is now auditing its financial reports by an audit firm. The auditor will consider in
planning its audit factors including audit difficulty, the environment in which the company
operate, prior experience with client and knowledge about the customer's business. In order to
increase audit performance and organize audit procedures along with customer service, the
auditor will wish to negotiate with the company aspects of his overall strategy and other
auditing procedures. However, the auditor is responsible for the whole audit process and the
audit program.

3.  Identifying Risks (15 marks)

The risk assessment procedure should be performed by the auditor to provide a reasonable basis
for determining and evaluating risk of material error or fraud, and to develop additional audit
procedures. There can be a range of material mistakes, including external factors such as
business and environmental conditions or company factors, which include company nature,
business and internal controls on financial reporting. The risk can arise from a range of sources.

For example

External or company-specific factors can affect the judgments involved in determining

accounting estimates or create pressures to manipulate the financial statements to achieve certain
financial targets.

Thus, the audit procedures that are necessary to identify and appropriately assess the risks of
material misstatement include consideration of both external factors and company-specific
factors. This standard discusses the following risk assessment procedures:

External factors can impact the opinion by auditors on accounting estimates or put pressure on
auditors to handle the financial statements in order to achieve financial objectives. There are
therefore external factors and company specific factors in the audit procedures that are set in
place to appropriately identify and assess the risk of material mistakes. The following standards
discusses the procedures for risk evaluation:[ CITATION Int09 \l 1033 ]

1) having knowledge of the business and their environment.

2) Considering internal financial reporting regulation.

 3) Consideration of customer acceptance and retention evaluations details, audit preparation
practices, past audits and other responsibilities undertaken for the company

(4) Conduct a review of the risks of material mistakes among auditing team members

5) Reviewing the chances of material misstatement by questioning with the audit committee,
the Board, and other agencies within the company.

4. Test of control (15 marks)

A check test is an audit process for the efficiency of a client control used to prevent or detect
material mistakes. The auditors can opt to use the control system of a customer for auditing
activities, depending on the results of this test. however, If the test shows that the controls are
weak, auditors will Increase their use of substantive testing, which will usually increase audit
costs. The following are general control test categories:

 Re-Performance -Auditors can start a new transaction to see how the controls and the
effectiveness of these controls are used by the customer.
 Observation – Auditors can monitor the business process in action and the controls of the
process.
 Inspection – Business documents, stamps, or inspection check marks which indicate that
checks were performed may be examined by auditors.

If the inspection approach is used, a check test is typically carried out for a sample of ransaction-
related documents which have taken place all year round. This shows that the control mechanism
has functioned efficiently over the monitoring time. If the control checkers encounter an error,
the sample size will be expanded and further tests are performed.

Example:

An auditor will perform an audit of ABC's financial statements and work on the audit will begin
shortly. But before that the auditors typically have to do the audit preparation to have it approved
by the audit partner before conducting the practical check or going to do fieldwork. At the
planning stage, many areas required by the standard must be documented and internal control is
tested in one of these areas.

5.  Substantive procedures (15 marks)

A substantive procedure is the process which creates evidence that assets and/or accounts of
the accounts are completed, existent, disclosed, correct or valued in five audit assertions. In
order to be certified as a valid procedure, adequate evidence must be obtained to enable the
auditor to execute the same procedure on the same records and to conclude the process.

Examples
Whenever an auditor conducts a procedure in which documentation is needed to support a
conclusion, a substantive procedure is carried out. These procedures may vary based on the asset
or account being audited.

6.   Opinion formulation (10 marks)

A certification accompanying financial statements is an opinion of an auditor. The report is

based on an audit of procedures and records used for reporting and gives an opinion on
whether the financial accounts contain material misstatements. An opinion of an auditor can
also be considered as an opinion of an accountant. [ CITATION Inv19 \l 1033 ]

• Audit of Unqualified Opinion — A unqualified opinion is also referred to as clean opinion. If

the financial statements are presumed free from material misstatements, the auditor
reports a clear opinion. Further, if management claims responsibility for the creation and
maintenance of its company and the auditor performs fieldwork in order to test its
effectiveness, an unqualified opinion on the internal controls of a company shall be given.
[ CITATION Inv19 \l 1033 ]

Example:
Suppose Company ABC is a publicly traded enterprise. Following the end of the year, XYZ
engages Auditor ABC to carry out the auditing of its previous fiscal year financial
statements, practicalities and checks. Auditor found no substantive bugs in the accounting
practices of Company ABC. Auditor gives an unqualified opinion in the form of a letter
accompanying the financial statements of Company ABC.

 Qualified Audit -A qualified opinion is provided if the financial records of the company in all
financial transactions hasn’t complied with GAAP. Although the meaning of qualified
opinion is much like an unqualified opinion, the auditor provides a further paragraph with
the financial statement containing deviations from the GAAP. Due to either an audit
limitation or the accounting method which did not comply with the GAAP, the qualified
opinion might also be issued. The deviation from GAAP, however, is not common place and
does not overlook the financial position of the entire company [ CITATION Inv19 \l 1033 ].

 Example:
The auditor finds that ABC 's inventory is down because of obsolescence. The company does
not, however, write the inventory down. A GAAP Departure reservation is formed in such a
situation. If only the inventory and cost of products sold are inaccurate, a qualified opinion
will be given due to a deviation from the GAAP.

 Adverse Opinion - An adverse opinion is the undesired opinion that a company might get.
An adverse view shows that financial records are not GAAP-compatible and are seriously
misunderstood. An adverse opinion may be an indicator of fraud; public bodies receiving a
negative opinion will be obliged to correct their financial statements and have their
 accounts re-audited. Investors, lenders and other financial institutions generally do not
accept adverse financial statements as part of their debt covenants [ CITATION Inv19 \l 1033 ].

Example:
ABC company is faced with a challenge that it cannot survive another year by an auditor.
The ABC company disagrees with this assumption of the auditor and instead of liquidating
its financial accounts, ABC company prepares its accounts on a cost basis. A GAAP
Departure reservation is formed in such a case. The majority of ABC Company accounts
have been incorrect, since they prepared their financial statements on a historical cost
basis. There would be an issue of a adverse opinion because of a departure from the GAAP

 Disclaimer of Opinion - In the event that the auditor is unable to complete the audit report
due to absence of financial records or insufficient cooperation from management, the
auditor issues a disclaimer of opinion. This is an indication that no opinion over the financial
statements was able to be determined. A disclaimer of opinion is not an opinion
itself[ CITATION Inv19 \l 1033 ].

Example:
The auditor looks at the record of the company minutes’ book which containing relevant
details about the board of directors and the audit committee. The auditor cannot check the
book of this minute because of denied access by ABC Company. An opinion reservation
notice is made in this case. As the auditor is unable to view the minute book, it is difficult to
review the rest of the company's accounts. A disclaimer of opinion will be given on account
of a scope limitation

7.    Audit completion of files. (10 Marks)

The auditor shall assemble the audit documentation in an audit file and complete the
administrative process of assembling the final audit file on a timely basis after the date of the
auditor’s report. The auditor shall not remove or erase any form of audit documentation until the
expiration of its retention period after the conclusion of the assembly of a final audit paper.
Where it is appropriate for the auditor to update existing audit reports or to add new audit
documents after a completion of the assembly of the finalized audit register, other than the
circumstances provided for in paragraph 13 of the ISA, the auditor must document the reasons
for creating them, regardless the kind of the changes or additions.[ CITATION Int09 \l 1033 ]

Example:

An example of audit documentation is the internal management records compiled by the auditor
in terms like Microsoft, Microsoft Excel or other program. Another audit documentation would
be the working paper that auditors prepare for audits and use to evaluate depreciation of
expenditures.[ CITATION Fin18 \l 1033 ]
References
Corporate Finance Institute. (n.d.). Auditor Opinions: Corporate Finance Institute. Retrieved from
Corporate Finance Institute:
https://corporatefinanceinstitute.com/resources/knowledge/accounting/auditor-opinions/

Finance Slide. (2018, August 14). Overview of the audit opinion formulation process: Finance Slide.
Retrieved from FinanceSlide: http://financeslide.blogspot.com/2016/09/overview-of-audit-
opinion-formulation.html

International Standard on Auditing (ISA) 230. (2009). INTERNATIONAL STANDARD ON AUDITING 230.

InvestingAnswers. (2009, October 1). Unqualified Opinion. Retrieved from InvestingAnswers:

InvestingAnswers: https://investinganswers.com/dictionary/u/unqualified-opinion

Investopidea. (2019, June 16). Auiting: Investopidea. Retrieved from Investopidea:

https://www.investopedia.com/

Wiki Accounting. (n.d.). Audit Test of Controls: Definition, Explanation, and Example: Wiki Accounting.
Retrieved from Wiki Accounting: https://www.wikiaccounting.com/audit-internal-control-
testing/