1.Why auditors cannot provide absolute assurance?

Auditors cannot provide absolute assurance due to several inherent limitations in the audit
process. Some of the key reasons why auditors cannot provide absolute assurance include:

1. Sampling: Auditors typically use sampling techniques to gather evidence about a company's
financial statements and internal controls. Since auditors cannot examine every single
transaction or item, there is always a risk that material misstatements may exist in the items
not selected for testing.

2. Use of Estimates: Financial statements often contain estimates, such as the valuation of
assets, provisions for doubtful debts, and other accounting estimates. These estimates involve a
degree of judgment and uncertainty, making it difficult for auditors to provide absolute
assurance about their accuracy.

3. Management Bias and Fraud: Auditors rely on representations and documents provided by
management. If management intentionally manipulates financial information or conceals fraud,
it can be challenging for auditors to detect such misconduct, especially if it involves collusion or
sophisticated schemes.

4. Complex Transactions: In today's business environment, companies engage in complex

financial transactions and structures that may be difficult to fully understand and evaluate
within the scope of an audit. This complexity increases the risk of errors or misstatements going
undetected.

5. Reliance on Internal Controls: While auditors assess and test internal controls, they do not
provide absolute assurance that all material misstatements will be detected. Control systems
can be circumvented or overridden, and weaknesses in controls may not be identified during
the audit process.

6. Going Concern Assumption: Auditors assess a company's ability to continue as a going

concern for the foreseeable future. However, unexpected events or changes in economic
conditions can impact a company's ability to continue operating, making it difficult for auditors
to provide absolute assurance about the company's long-term viability.

These limitations mean that while auditors perform their work with professional skepticism and
due diligence, they cannot eliminate all risks of material misstatement or fraud. As a result,
auditors issue an opinion that provides reasonable assurance, which is a high but not absolute
level of confidence in the accuracy of the financial statements.

Q2. What are assertions and What are the seven classification of assertion ?

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Financial statement assertions are statements or claims that companies make about the
fundamental accuracy of the information in their financial statements. These statements
include the balance sheet, income statement, and cash flow statement. Also referred to as
management assertions,

Assertions, in the context of auditing, refer to representation made by management regarding

the recognition , measurement, presentation, and disclosure of items in the financial
statements. These are assertions about the completeness, accuracy, and validity of the financial
statement components.

The seven classification of assertions are :

1. Occurrence : This assertion refers to the transactions and events that have been recorded
actually occurring and pertain to the entities.

2. Completeness : it relates to the completeness of the recorded transactions and events,

ensuring that all transactions and events that should have been recorded are indeed included in
the financial statements.

3. Accuracy : This assertion verifies the accuracy and correctness of the recoded transaction and
balances, ensuring that they have been Accurately stated.

4. Cutoff : cutoff assertion ensures that the transactions have been recoded in the correct
accounting period.

5. Classification: it ensures that transaction have been included in the appropriate accounts
and within the correct headings, and subheadings in the financial statements.

6. Presentation: This assertion ensures that the components of the financial statements are
properly arranged and presented in accordance with the applicable financial reporting
framework.

7. Rights and Obligations: This assertion verifies the right of the entity to the asset and the
obligations related to the liability at a given date.

3. Whatis the principal use and significance of auditing to users of financial statements?
Auditing is the process of examining and verifying the financial statements of an organization by
an independent auditor. The principal use and significance of auditing to users of financial
statements are
 It provides assurance that the financial statements are fair and accurate, and reflect
the true financial position and performance of the organization.

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  It enhances the credibility and reliability of the financial statements, and reduces the
risk of fraud, error, or misstatement.
 It helps the users of financial statements, such as investors, lenders, regulators, and
other stakeholders, to make informed economic decisions based on the audited
information.
 It provides a holistic view of the organization, by examining its various aspects and
functions.
 It helps improve the efficiency of the organization, by spotting redundancies, waste,
or gaps in the business processes and governance.
Creditors, such as banks and financial institutions, use audited financial statements to
assess the creditworthiness of an entity. Reliable financial information helps creditors
make informed decisions about lending and managing credit risk.
Audited financial statements contribute to the efficiency of financial markets by
providing a standardized and trustworthy set of information. This facilitates fair
competition among companies and allows investors to allocate capital efficiently.
4.What is the basic purpose of a code of ethics for a profession?

The basic purpose of a code of ethics for a profession is to guide professionals in acting in a way
that is considered ethical and responsible. This can be achieved in several key ways:

1. Defining ethical principles: Codes of ethics outline core values and principles that should
guide a professional's conduct. These principles might include honesty, integrity, fairness,
respect, confidentiality, and competence. By having a clear understanding of these principles,
professionals can make better decisions in complex situations.

2. Providing specific guidance: Codes of ethics often go beyond broad principles and offer
specific guidelines for common ethical dilemmas that professionals might face. This can help
professionals understand how to apply the principles in specific situations, like conflicts of
interest, confidentiality breaches, or potential discrimination.

3. Maintaining public trust: By establishing clear ethical standards, professions can build and
maintain public trust. This trust is essential for many professions, such as healthcare, law, and
finance, where clients and customers rely on professionals to act in their best interests.

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4. Promoting consistency: Codes of ethics help ensure that all professionals within a field are
held to the same basic standards. This consistency can help to protect the public and maintain
fairness within the profession.

5. Fostering accountability: When a professional violates a code of ethics, there can be

consequences, such as disciplinary action or loss of license. This accountability helps to ensure
that professionals comply with the code and upholds the ethical standards of the profession.

It's important to note that codes of ethics are not static documents. They should be
reviewed and updated regularly to reflect changes in the profession and society.
Additionally, codes of ethics are usually accompanied by enforcement mechanisms to
ensure compliance

Q5. What are assertions and What are the seven classification of assertion ?

Financial statement assertions are statements or claims that companies make about the
fundamental accuracy of the information in their financial statements. These statements
include the balance sheet, income statement, and cash flow statement. Also referred to as
management assertions,

Assertions, in the context of auditing, refer to representation made by management regarding

the recognition , measurement, presentation, and disclosure of items in the financial
statements. These are assertions about the completeness, accuracy, and validity of the financial
statement components.

The seven classification of assertions are :

1. Occurrence : This assertion refers to the transactions and events that have been recorded
actually occurring and pertain to the entities.

2. Completeness : it relates to the completeness of the recorded transactions and events,

ensuring that all transactions and events that should have been recorded are indeed included in
the financial statements.

3. Accuracy : This assertion verifies the accuracy and correctness of the recoded transaction and
balances, ensuring that they have been Accurately stated.

4. Cutoff : cutoff assertion ensures that the transactions have been recoded in the correct
accounting period.

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5. Classification: it ensures that transaction have been included in the appropriate accounts
and within the correct headings, and subheadings in the financial statements.

6. Presentation: This assertion ensures that the components of the financial statements are
properly arranged and presented in accordance with the applicable financial reporting
framework.

7. Rights and Obligations: This assertion verifies the right of the entity to the asset and the
obligations related to the liability at a given date.

6.Standards are authoritative rules for measuring the quality of performance.

The existence of generally accepted auditing standards is evidence that auditors are very
concerned with the maintenance of a uniformly high quality of audit work by all independent
public accountants.

The GAAS are stated in their entirety as follows:

 General standards
1.The examination is to be performed by a person or persons having adequate technical
training and proficiency as auditor.

2.In all matters relating to the assignment, an independence in mental attitude is to be

maintained by the auditor or auditors.

3.Due professional care is to be exercised in the performance of the examination and the
preparation of the report.

 Standards of fieldworK
1.The work is to be adequately planned and assistants, if any, are to be properly supervised.

2.The auditor should obtain a sufficient understanding of the internal control structure to plan
the audit and to determine the nature, extent and timing of tests to beperformed.

3.Sufficient competent evidential matter is to be obtained through inspection, observation,

inquiries, and confirmation to afford a reasonable basis for an opinion regarding the financial
statements under examination.

 Standards of reporting

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 1.The report shall state whether the financial statements are presented in accordance with
generally accepted accounting principles.

2. The report shall identify those circumstances in which such principles have not been
consistently observed in the current period in relation to the preceding period.

3.Informative disclosures in the financial statements are to be regarded as reasonably adequate

unless otherwise stated in the report.

4.The report shall either contain an expression of opinion regarding the financial statements,
taken as a whole, or an assertion to the effect than an opinion cannot be expresse

7. Define audit evidence.

dit evidence is any information used by the auditor to determine whether the information
being audited is stated in accordance with the established criteria. The information varies
greatly in the extent to which it persuades the auditor whether the financial statements are
stated in accordance with Generally Accepted Accounting Principles. Evidence includes
information that is highly persuasive, such as the auditor's count of marketable securities, and
less persuasive information, such as response to questions of client employees.

The Audit Evidence Decision

A major decision facing every auditor is determining the appropriate types and amounts of
evidence to accumulate to be satisfied that the components of the client's financial statements
are fairly stated. This judgment is important because of the prohibitive cost of examining and
evaluating all available evidence. For example, in an audit of financial statement, of most
organizations, it is impossible for CPA firm to examine the contents of all computer files or
available evidence such as cancelled checks, vendors' invoices, customer orders, payroll time
cards, and the many other types of documents and orders. The auditor's decision on evidence
accumulation can be broken down into the following four sub decisions.

Which audit procedure to use

What sample size to select for a given procedure

Which items to select from the population

When to perform the procedure

Audit Procedure: an audit procedure is the detailed instruction for the collection of audit
evidence that is to obtain at some time during the audit. In designing audit procedures, it is

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common to spell them out in sufficiently specific to permit their use as instructions during the
audit. For example, the following is an audit procedure for the verification of cash
disbursements:

Obtain the cash disbursements journal and compare the payer name, amount, and date on the
cancelled checks with the disbursements journal

Sample size: Once an audit procedure is selected, it is possible to vary the sample size from one
to all the items in the population being tested. In the audit procedure above, suppose 6,600
checks are recorded in the cash disbursement journal. The auditor may select a sample size of
200 checks for comparison with the cash disbursement journal. The decision of how many
items to test must be made by the auditor for each audit procedure. The sample size for any
given procedure is likely to vary from audit to audit.

Items to select: After the sample size has been determined for an audit procedure, it is still
necessary to decide which items in the population to test.

Timing: Auditor of financial statements usually covers a period such as a year, and an audit is
usually not completed until several weeks or months after the end of the period. The timing of
audit procedures can therefore vary from early in the accounting period to long after it has
ended. In part, the timing decision is affected by when the client needs the audit to be
completed.

8.Identify the four basic types of opinions that an auditor may issue.

The Auditor's report is a formal opinion, or disclaimer there issued by either an internal auditor
or an independent external auditor as a result of an internal or external audit or evaluation
performed on a legal entity or subdivision thereof (called an “auditee”). Reports are essential to
audit and assurance engagement, because they communicate the auditor’s findings. Users of
financial statement rely on the auditor’s report to provide assurance on the company’s financial
statement. The auditor is held responsible if an incorrect audit report is issued. The audit report is
the final step in the entire audit process. The reason for studying it now is to permit reference to
different audit reports as evidence accumulation and audit procedures are studied in this and
second part of auditing.
There are four types of audit
1. unqualified opiniom 3. adverse opinion
2. qualified opinion 4.Denial opinion

1.Unqualified opinion

In certain situation, an unqualified audit report is issued, but the wording deviates from the
standard unqualified report. The unqualified audit report with explanatory paragraph or modified

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wording meets the criteria of a complete audit with satisfactory results and financial statements
that are fairly presented, but the auditor believes it is important or is required to provide
additional information. The followings are the most important causes of the addition of an
explanatory paragraph or a modification in the wording of the standard unqualified report
1. Lack of consistent Application of GAAP
2. Consistency versus Comparability
3. Substantial Doubt about Going Concern
4. Auditors Agrees with a Departure from a Promulgated Principle
5. Emphasis of Matter

6.Reports involving Other Auditors

2.qualified opinion

A Qualified Opinion report is issued when the auditor encountered one of the two types of
situations which do not comply with generally accepted accounting principles, however, the
rest of the financial statements are fairly presented. This type of opinion is very similar to an
unqualified or “clean opinion”, but the report states that the financial statements are fairly
presented with a certain exception which is otherwise misstated.

The two types of situations which would cause an auditor to issue this opinion over the
unqualified opinion are:

Deviation from GAAP – this type of qualification occurs when one or more areas of the
financial statements do not conform with GAAP (e.g. are misstated), but do not affect
the rest of the financial statements from being fairly presented when taken as a whole.
Examples of this include a company dedicated to a retail business that did not correctly
calculate the depreciation expense of its building. Even if this expense is considered
material, since the rest of the financial statements do conform with GAAP, then the
auditor qualifies the opinion by describing the depreciation misstatement in the report
and continues to issue a clean opinion on the rest of the financial statements.

Limitation of Scope - this type of qualification occurs when the auditor could not audit
one or more areas of the financial statements, and although they could not be verified,
the rest of the financial statements were audited and they conform with GAAP.
Examples of this include an auditor not being able to observe and test a company’s
inventory of goods. If the auditor audited the rest of the financial statements and is
reasonably sure that they conform with GAAP, then the auditor simply states that the

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 financial statements are fairly presented, with the exception of the inventory which
could not be audited.

3. Adverse opinion

An Adverse Opinion is issued when the auditor determines that the financial statements of an
auditee are materially misstated and, when considered as a whole, do not conform to GAAP. It
is considered the opposite of an unqualified or clean opinion, essentially stating that the
information contained is materially incorrect, unreliable, and inaccurate in order to assess the
auditee’s financial position and results of operations. Investors, lending institutions, and
governments very rarely accept an auditee’s financial statements if the auditor issued an
adverse opinion, and usually request the auditee to correct the financial statements and obtain
another audit report.

4. Disclaimer Opinion

A Disclaimer of Opinion, commonly referred to simply as a Disclaimer, is issued when the

auditor could not form, and consequently refuses to present, an opinion on the financial
statements. This type of report is issued when the auditor tried to audit an entity but could not
complete the work due to various reasons and does not issue an opinion.

Auditing Standards provide certain situations where a disclaimer of opinion may be

appropriate:

A lack of independence, or material conflict(s) of interest, exist between the auditor and the
auditee There are significant scope limitations, whether intentional or not, which hinder the
auditor’s work in obtaining evidence and performing procedures

There is a substantial doubt about the auditee’s ability to continue as a going concern or, in
other words, continue operating

9. What is meant by the term reservation?

In the auditing context, the term "reservation" typically refers to a note or comment made by
an auditor regarding a particular aspect of a company's financial statements or internal
controls. This could be a reservation about the accuracy or completeness of the financial
records, concerns about the company's ability to continue as a going concern, or other issues
that the auditor believes need to be highlighted to the stakeholders.

Reservations in auditing are important because they communicate areas of potential risk or
uncertainty to the users of the financial statements. These reservations are usually included in

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the auditor's report, which is a key component of the audit process and provides an opinion on
the fairness of the financial statements

10. What type of audit report (unqualified opinion, except for opinion, adverse opinion,
denial of opinion) should the auditors generally issue in each of the following situations?
Explain.

a. Client imposed restriction limit very significantly the scope of the auditors’ procedures.
b.The auditors decide that it is necessary to make reference to their report of another public
accounting firm (the secondary auditors).

c.The auditors believe that the financial statements have been stated in conformity with
generally accepted accounting principles in all respects other than the treatment and
disclosure of a material uncertainty.

Answer

a. In the situation where the client imposed restrictions significantly limiting the scope of
the auditors' procedures, the auditors would typically issue a qualified opinion. This is
because they were unable to obtain sufficient appropriate audit evidence to support an
unqualified opinion due to the limitations imposed by the client.

b. When the auditors decide that it is necessary to make reference to their report of
another public accounting firm (the secondary auditors), they would issue an unqualified
opinion with an explanatory paragraph. This paragraph would explain the involvement of
the secondary auditors and the reasons for referencing their report.

c. If the auditors believe that the financial statements have been stated in conformity with
generally accepted accounting principles in all respects other than the treatment and
disclosure of a material uncertainty, they would issue an unqualified opinion with an
emphasis of matter paragraph. The emphasis of matter paragraph would draw attention to
the material uncertainty and explain its impact on the financial statements.

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Reference

 Auditing and Assurance service 14th edition

 Principle of auditing second edition

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