Mervidelle F.

Castro

Prelim Exam Aud 1

1. Define auditing.
Auditing is the process of examining an organization’s financial records by
systematically obtaining evidence to determine if they are accurate and in accordance
to the established criteria and communicating the results thereof. It can be done by and
internal or external auditor.
2. Briefly explain the objectives of an audit.
The objective of an audit is for the auditor to express an opinion regarding the
fairness of the financial statements. The medium for the auditor to express his opinion is
called the “auditor’s report”, or in some circumstances, disclaims an opinion.
3. Briefly explain why independent auditing is necessary.
When performing an assurance audit, the auditor should be independent in mind
and in appearance as to eliminate and reduce treats to independence. Threats may be
created by a broad range of relationships and circumstances wherein it could
compromise the auditor’s compliance to fundamental principle and thus can lead to a
biased audit of financial statements.
4. Briefly explain the major steps in financial statements audit.
Major steps in financial statements audit are:
a. Pre-engagement - carrying out the initial audit activities, such as client
acceptance and agreement on the terms of engagement.
b. planning the audit – it involves establishing the audit strategy for the
engagement and developing an audit plan. It includes obtaining an
understanding of the client and its environment.
c. study and evaluation of internal control – determining whether adequate
controls are in place and functioning properly. The auditor test various forms
of controls and determine the degree of reliance he can ascribe from this
controls as it will affect the degree of substantive testing to be performed.
d. substantive testing –this are procedures to detect material misstatements.
This is the detailed investigation of specific account balances and
transactions to determine the accuracy of the accounts presented in financial
statements
e. completing the audit – the auditor communicates the updated list of findings
to managements and to those charged with governance.
f. issuance of the audit report – steps were the auditor prepares the audit report
and states the opinion regarding the fairness of the financial statements.
5. Identify and describe the different form of audit opinion.
a. Unqualified opinion – it communicates a favorable signal regarding the
financial statements.
b. Qualified opinion - it communicates a favorable signal regarding the financial
statements, but with modifications. One example that could lead to this is that the
financial statements are fairly presented but there are misapplications of accounting
principles.
c. Adverse opinion – it communicates an unfavorable signal. This is issued when
the financial statements are qualified for qualified opinion, but the issue leading to
qualification is so material.
d. Disclaimer opinion – it signals that an auditor does not express an opinion.
This is presented when an auditor has not performed an audit sufficient for him to
express an opinion.