1.

Auditor’s response to:

I. Auditor’s staff assignment
 Nature- Auditors should consider the assignment and supervision of the audit personnel i.e.
the auditor may respond to identified high risks of fraud by assigning more experienced
individuals to the audit or additional specialists or increasing the level of supervision. There
should be discussion among the engagement team members and a determination by the
engagement partner of which matters are to be communicated to those team members not
involved in the discussion.
 Composition- The team leader of a combined or integrated audit is expected to have in-depth
knowledge of at least one of the standards and an awareness of the other standards used for
that particular audit. The necessary knowledge and skills of the audit team leader and
auditors may be supplemented by technical experts, translators and interpreters who shall
operate under the direction of an auditor. Where translators or interpreters are used, they shall
be selected such that they do not unduly influence the audit. The audit team leader, in
consultation with the audit team, shall assign to each team member responsibility for auditing
specific processes, functions, sites, areas or activities. Such assignments shall take into
account the need for competence, and the effective and efficient use of the audit team, as well
as different roles and responsibilities of auditors, auditors-in-training and technical experts.
Changes to the work assignments may be made as the audit progresses to ensure achievement
of the audit objectives.
 Status of auditor’s to be assigned-Assigning more experienced staff or those with special
skills or using experts. The engagement may require more experienced staff. CPA firms
should staff all engagements with qualified staff. For low acceptable audit risk clients,
special care is appropriate in staffing, and the importance of professional skepticism should
be emphasized. Similarly, if an audit area such as inventory has a high inherent risk, it is
important to assign that area to someone with experience in auditing inventory.
II. Nature, timing and extent of subsequent procedures
 Nature- all mixed procedure to be applied by the auditor extensively and intensively. The
auditor’s assessed risks may affect both the types of audit procedures to be performed and
their combination. For example, when an assessed risk is high, the auditor may confirm the
completeness of the terms of a contract with the counterparty, in addition to inspecting the
 document. Further, certain audit procedures may be more appropriate for some assertions
than others. For example, in relation to revenue, tests of controls may be most responsive to
the assessed risk of misstatement of the completeness assertion, whereas substantive
procedures may be most responsive to the assessed risk of misstatement of the occurrence
assertion.
 Timing- Conducting more audit procedures as of the period end rather than at an interim
date. The auditor may perform tests of controls or substantive procedures at an interim date
or at the period end. The higher the risk of material misstatement, the more likely it is that the
auditor may decide it is more effective to perform substantive procedures nearer to, or at, the
period end rather than at an earlier date, or to perform audit procedures unannounced or at
unpredictable times (for example, performing audit procedures at selected locations on an
unannounced basis).
 Extent of subsequent audit procedures- The extent of audit procedures increases as the risk
of material misstatement increases. For example, in response to the assessed risk of material
misstatement due to fraud, increasing sample sizes or performing substantive analytical
procedures at a more detailed level may be appropriate. However, increasing the extent of an
audit procedure is effective only if the audit procedure itself is relevant to the specific risk.
 Inspection (tangible and intangible assets)
 Confirmation
 Inquiries
 Observation
 Recalculation
 Reperformance
 Analytical Procedures
III. The professional skepticism & professional due care of the auditor
 Due professional care requires the auditor to exercise professional skepticism. Professional
skepticism is an attitude that includes a questioning mind and a critical assessment of the
appropriateness and sufficiency of audit evidence. The auditor's responses to the assessed
risks of material misstatement, particularly fraud risks, should involve the application of
professional skepticism in gathering and evaluating audit evidence.
 Emphasizing to the audit team the need to maintain professional skepticism.
  Because of the characteristics of fraud, the auditor's exercise of professional skepticism is
important when considering the fraud risks. Professional skepticism is an attitude that
includes a questioning mind and a critical assessment of audit evidence. The auditor should
conduct the engagement with a mindset that recognizes the possibility that a material
misstatement due to fraud could be present, regardless of any past experience with the entity
and regardless of the auditor's belief about management's honesty and integrity. Furthermore,
professional skepticism requires an ongoing questioning of whether the information and
evidence obtained suggests that a material misstatement due to fraud has occurred. In
exercising professional skepticism in gathering and evaluating evidence, the auditor should
not be satisfied with less-than-persuasive evidence because of a belief that management is
honest.

The exercise of due professional care allows the auditor to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether caused by error or
fraud, or whether any material weaknesses exist as of the date of management's assessment.

IV. To the assessment of detection risk of the auditor

 make general changes to the nature, timing or extent of audit procedure
 emphasize to the audit team the need to maintain professional skepticism
 assigning more experienced staff, those with special skills or using experts
 incorporating additional elements of unpredictability in the selection of further audit
procedures to be performed
 Perform adequate planning
 Appropriate assignment of staff to the engagement team
 Apply professional skepticism
 Perform adequate supervision and review of the audit work performed
 Take appropriate sampling technique and sample size
V. Auditor’s reliance on internal control system of the client.
 Deficiencies in the control environment have low confidence in internal control and the no
reliability of audit evidence generated internally within the entity; for example, the auditor
may respond to an ineffective control environment by:
 Conducting more audit procedures as of the period end rather than at an interim date.
  Obtaining more extensive audit evidence from substantive procedures.
 Increasing the number of locations to be included in the audit scope.
 Limited reliance can be placed on documentary evidence created within the organization and
not reviewed by outsiders. Weak internal control often results in documents being prepared
by individuals whose duties give them an incentive to create false documentation. For
example, an employee with access to cash receipts may also issue credit memoranda that are
not subject to supervisory review. If a cash shortage arises for any reason, the employee may
be tempted to “solve the problem” by issuing fraudulent credit memoranda. Failure to
account for all documents by serial number is also a threat because this practice leaves the
auditors with no assurance that a population of documents is complete. Finally, weak internal
control provides a setting in which management could, if it chose to do so, use false
supporting documents for the dual purpose of supporting misleading financial statements and
deceiving the auditors. b. Reliance upon physical evidence may increase when internal
control is weak. For example, if internal control over inventory is weak, the auditors may
place more weight upon a complete physical inventory taken at the balance sheet date.
 Reliance upon evidence provided by specialists may be increased if internal controls over
inventory are weak. In addition to emphasizing a complete physical count at the balance
sheet date, the auditors may want the assurance of independent experts (specialists) as to the
quality and condition of the wine inventory.
 Reliance upon analytical procedures may be increased. The weakness in internal control
could cause large errors in account balances. Consequently, the analytical procedures that
call attention to any unusual relationship between amounts in the financial statements take on
added importance.
 Reliance upon accounting records as evidence tends to be reduced when internal controls are
weak. The reliability of journals and ledgers is determined by the strength of internal controls
in their preparation. For example, if the same person who maintains the general ledger
maintains subsidiary ledgers, little assurance of accuracy is provided by agreement between
these records. Similarly if there are no control measures to insure that all retirements of plant
and equipment are recorded, the equipment shown in the records may in fact no longer be
used in operations.
VI. Auditor’s considerations for the use of the experts.
 Auditor’s consideration for the use of expert will be competent, capable and objective expert for
the interpretation of:

o Contracts
o Laws
o Regulations
VII. Auditor’s assessments for sufficiency & competencies of audit evidences

Obtaining more extensive audit evidence from substantive procedures. It is difficult to measure
the amount of evidence implied by a given planned detection risk. A typical audit program
intended to reduce detection risk to the planned level is a combination of several audit
procedures, each using a different type of evidence which is applied to different audit objectives.
Auditors’ measurement methods are too imprecise to permit an accurate quantitative measure of
the combined evidence. Instead, auditors subjectively evaluate whether sufficient appropriate
evidence has been planned to satisfy a planned detection risk of low, medium, or high.
Presumably, measurement methods are sufficient to permit an auditor to determine whether more
or different types of evidence are needed to satisfy a low planned detection risk than for medium
or high. Considerable professional judgment is needed to decide how much more.

The auditor mean to assess whether the information acquired from the former risk assessment
procedures and related activities done shows that one or more fraud risk factors are existent.
Whereas fraud risk factors may not certainly show the existence of fraud, they have often been
present in conditions where frauds have occurred and consequently may indicate risks of
material misstatement due to fraud.

The auditor had better plan and ought to complete substantive procedures to be reactive to the
associated planned level of detection risk, which comprises the results of tests of controls, if any.
The auditor's risk assessment is judgmental, though, and may not be sufficiently specific to
recognize all risks of material misstatement.

Additional, there are inherent limitations in internal control, comprising the risk of management
override, the possibility of human error, and the effect of systems changes. Therefore, regardless
of the assessed risk of material misstatement, the auditor should design and make substantive
 procedures for entirely appropriate assertions related to each material class of transactions,
account balance, and disclosure to get adequate appropriate audit evidence.

The auditor should use one or more types of the audit procedures or combinations thereof may be
used as risk assessment procedures, tests of controls, or substantive procedures, depending on the
context in which they are applied by the auditor.

VIII. Auditor’s communications to those charged with Governances for audit related matters

As stated in the question disclaimer opinion is becoming the legacy of the entity. This show that
management has imposed a limitation on the scope of the audit that the auditor considers likely
to result in the need to express a qualified opinion or to disclaim an opinion on the financial
statements, so the auditor shall request that management remove the limitation. If management
refuses to remove the limitation, the auditor shall communicate the matter to those charged with
governance, unless all of those charged with governance are involved in managing the entity,
and determine whether it is possible to perform alternative procedures to obtain sufficient
appropriate audit evidence.

IX. Audit opinions & conclusions

AUDITOR'S REPORT

Board of Directors, Stockholders, Owners, and/or Management of

XYZ Company, Inc.

Addis Ababa, Ethiopia

We have audited the supplementary financial statements of XYZ Company, Inc., which
encompass the balance sheet as of December 31, 2020, and the related statements of income,
retained earnings, and cash flows for the year then ended, and the related notes to the financial
statements.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated
financial statements in accordance with generally accepted accounting principles; this includes
the design, implementation, and maintenance of internal control relevant to the preparation and
fair presentation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor's Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on

our audit. We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of significant accounting
estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.

Scope

Except as discussed in the following paragraph, we conducted our audit, the procedures selected
depend on the auditors' judgment, including the assessment of the risks of material misstatement
of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity's preparation and fair
presentation of the consolidated financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity's internal control. Accordingly, we express no such opinion.
However, we could not audit most of the financial statements as they could not be verified.

The audit was performed in accordance with the country’s prevailing generally accepted auditing
standards and regulations.

Basis for Adverse Opinion

As stated earlier, the company has not consolidated the financial statements because it has not
yet been able to establish the fair values of assets and liabilities. Due to the effects of the
Company’s inventory and misplaced and misstated financial statement and the results of its
operations and its cash flows for the year then ended not in accordance with generally accepted
accounting principles. The financial statements don’t give a true and fair view.

Adverse Opinion

In our opinion, because of the significance of the matter discussed in the Basis for Adverse
Opinion paragraph, the consolidated financial statements do not present fairly the financial
position of the company and of its financial performance and their cash flows for the year 2020
ended with the accordance with International Financing Reporting Standards.
AUDITOR'S SIGNATURE

Bezawit Abrham

June 10, 2020

2. Hotel Industry Formidably Implicated by the COVID-19 Pandemic

A pandemic is a situation that halts almost all operations of businesses and other operational
activities that are supposed to take place. Since the activities are all related to the contribution to
the economy, the world economy comes to a standstill while the fight to the pandemic uses the
savings and reserve funds held by the different states and businesses. However, the case has not
been the same in the hotel industry where the COVID-19 pandemic has called for social
distancing that cannot allow hotels to operate.
 Business Risks
 Lack of generation of revenues because there is no sale taking place
 Losing of jobs by the employees within the hotel industry
 Incurring of fixed costs despite closing on business operations
 Shrinkage of buying power of customers subsequently the buying power of customers
will lesser due to decreased economic activities of the people.
 Financial Statements Risks
 The financial position of the businesses will lose value as the reports will not reflect
healthy statements that can be used by the financial institutions to finance projects.
 Due to the poor financial information presented, the hotel industry will lack potential
investors who can bring more capital to the business to enable revival from the poor
performance during the pandemic.
 The accounting standard requires the use of expected credit losses method, the risk of
collecting receivables now is high due to the fact that customers will have lower
purchasing power and low liquidity.
 Audit Risks
 Since the businesses will be aiming to present healthy financial statements, the audit
exercise will experience a lot of mistakes and overstatements of values of items to enable
the business achieve their goals.
 The internal audit team will be under intimidation and managing to meet the set
requirements of auditing can be a challenge. Therefore, the investigation work to be done
by the external auditors can create a great challenge.
 Increase in risk of fraud can increase