MID QUESTIONS

1. Identify the causes of information risk and explain how this risk can be reduced?
Major causes of information risk
1. Remoteness of information-It means the ability to make decisions from first-hand information. Due to
secondhand information intentionally or unintentionally misstated it increases.
2. Biases and motives of divider- If the information provider's intention is dishonest it is possible to give biased
information
3. Voluminous of the data-large volume of information helps to reduce risk than smaller ones.
4. Complex expense transactions- Due to transactions of large scale and complexity it creates problems to
identify and realize the correct one.

The three main ways to reduce information risk are:

1. User verifies the information-
2. User shares the information risk with management.
3. Audited financial statements are provided.

Importance of auditing in reducing information risk

Auditors are valued because of
1. Technical knowledge
2. Assist companies to improve
a. Operation
b. Internal control
3. Make suggestions that improve profitability by
a. Reducing cost
b. Reduction of errors and fraud
c. Improving operational
2. differentiate the three main types of audits.
OPERATIONAL AUDITS COMPLIANCE AUDITS AUDITS OF FINANCIAL
STATEMENTS
PURPOSE To evaluate whether To determine whether the To determine whether the overall
operating procedures are client is following specific financial statements are
efficient and effective procedures set by higher presented by specified criteria
authority (usually GAAP)
USERS OF Management of Authority setting down Different groups for different
AUDIT organization procedures, internal or purposes — many outside entities
REPORT external
NATURE Highly nonstandard; often Not standardized, but specific Highly standardized
subjective and usually objective
PERFORMED
BY: CPAs Frequently Occasionally Almost universally
GAO Frequently Frequently Occasionally
AUDITORS
IRS Never Universally Never
AUDITORS
INTERNAL
AUDITORS Frequently Frequently Frequently

3. identify quality control standards and practices within the accounting profession.
A system of quality control is broadly defined as a process to provide the firm with reasonable assurance that its
personnel complies with applicable professional standards and the firm’s standards of quality. The quality control
policies and procedures applicable to a firm's accounting and auditing practice should encompass the following
elements:
• Independence, Integrity, and Objectivity: (Relevant ethical requirement)
• Personnel Management.
• Acceptance and Continuance of Clients and Engagements.
• Engagement Performance.

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 • Monitoring.

4. Specify the conditions required to issue the standard unqualified audit report.
The standard unqualified audit report is issued when the following conditions have been met:
1. All statements—balance sheet, income statement, statement of changes in stockholders' equity, and statement
of cash flows—are included in the financial statements
2. Sufficient appropriate evidence has been accumulated, and the auditor has conducted the engagement in a manner
that enables him or her to conclude that the audit was performed by auditing standards
3. The financial statements are presented by the U.S. generally accepted accounting principles or another appropriate
accounting framework. This also means that adequate disclosures have been included in the footnotes and other
parts of the financial statements
4. no circumstances are requiring the addition of an explanatory paragraph or modification of the wording of the
report.

2019.
1.
a. Distinguish between an unqualified report with an explanatory paragraph on modified working and qualified
report. Give examples of when an explanatory paragraph should be used in an unqualified opinion.
An unqualified report with an explanatory paragraph-A complete audit took place with satisfactory results and
financial statements that are fairly presented, but the auditor believes that it is important or is required to provide
additional information.
Qualified report- The auditor concludes that the overall financial statements are fairly presented, but the scope of
the audit has been materially restricted, or applicable accounting standards were not followed in preparing the
financial statements.
b. Identify the most important reasons for performing a physical examination.
Physical examination is the inspection or count by the auditor of a tangible asset. This type of evidence is most
often associated with inventory and cash, but it is also applicable to the verification of securities, notes receivable,
and tangible fixed assets.
Physical examination is when the auditor conducting the audit sees and confirms the existence of an asset. Often,
a physical examination is not available, simply because of the nature of the audit. For example, if an auditor is
confirming payroll expenses, the auditor cannot realistically physically watch someone work the hours they will be
paid for.
However, when testing physical assets, such as inventory or equipment, physical inventory is often the most useful
evidence. By going to the warehouse and confirming inventory accounts are accurate by counting inventory or
confirming an asset exists by seeing it in person, the auditor is obtaining strong evidence through physical
examination.

c Explain how materiality differs from failure to follow GAAP and for the lack of independence.
Materiality is an essential consideration in determining the appropriate type of report for a given set of
circumstances. For example, if a misstatement is immaterial relative to the financial statements of the entity for
the current period, it is appropriate to issue an unqualified report. A common instance is the immediate expensing
of office supplies rather than carrying the unused portion in inventory because the amount is insignificant. The
situation is different when the amounts are of such significance that the financial statements are materially affected
as a whole. In these circumstances, it is necessary to issue a disclaimer of opinion or an adverse opinion, depending
on whether a scope limitation or GAAP departure is involved. In situations of lesser materiality, a qualified opinion
is appropriate.
d. Describe an ethical dilemma. How does a person resolve an ethical dilemma?
An ethical dilemma is a situation in which two moral principles conflict with one another. An ethical dilemma is a
situation a person faces in which a decision must be made about the appropriate behavior. An ethical dilemma (ethical
paradox or moral dilemma) is a problem in the decision-making process between two possible options, neither of
which is acceptable from an ethical.
Examples of the ethical dilemmas are-
• Taking credit for others’ work
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 • Offering a client a worse product for your profit
• Utilizing inside knowledge for your profit

How to Solve an Ethical Dilemma?

The biggest challenge of an ethical dilemma is that it does not offer an obvious solution that would comply with ethics
al norms. Throughout the history of humanity, people have faced such dilemmas, and philosophers aimed and worked
to find solutions to them.
The following approaches to solve an ethical dilemma were deduced:
1. Obtain the relevant facts.
2. Identify the ethical issues from the facts.
3. Determine who is affected by the outcome of the dilemma and how each person or group is affected.
4. Identify the alternatives available to the person who must resolve the dilemma.
5. Identify the likely consequence of each alternative.
6. Decide the appropriate action.
2. a. Show how to audit evidence that had been used by the auditor for several types of audit tests.
b. What is the distinction between internal and external audits.
Internal Audit and External Audit are not opposed to each other. Instead, they complement each other. External
Auditor may use the work of the internal auditor if he thinks fit, but it does not reduce the responsibility of the
external auditor. Internal Audit acts as a check on the activities of the business and assists by advising on various
matters to gain operational efficiency.
On the other hand, an external audit is entirely independent in which a third party is brought to the organization to
carry out the procedure. It checks the accuracy and validity of the annual accounts of the organization.
BASIS FOR INTERNAL AUDIT EXTERNAL AUDIT
COMPARISON
Meaning Internal Audit refers to an ongoing audit External Audit is an audit function performed
function performed within an organization by by an independent body that is not a part of
a separate internal auditing department. the organization.
Objective To review the routine activities and provide To analyze and verify the financial statement
suggestions for improvement. of the company.
Conducted by Employees Third-Party
The auditor is Management Members
appointed by
Users of Report Management Stakeholders
Opinion The opinion is provided on the effectiveness of The opinion is provided on the truthfulness
the operational activities of the organization. and fairness of the financial statement of the
company.
Scope Decided by the management of the entity. Decided by the statute.
Obligation No, it is voluntary Yes, according to the Indian Companies Act,
1956.
Period Continuous Process Once in a year
Checks Operational Efficiency Accuracy and Validity of Financial Statement

c. Describe types of audit evidence with examples of each.

In deciding which audit procedures to use, the auditor can choose from eight broad categories of evidence, which are
called types of evidence. Every audit procedure obtains one or more of the following types of evidence:
1. Physical examination: Physical examination means that the auditor physically verifies the existence of an asset. A
physical examination requires the auditor to be present at the location of the asset to verify that it exists. Examples-
inspection or count or tangible assets count the cash, inventory; actually, go to building
2. Confirmation: Confirmation describes the receipt of a direct written response from a third party verifying the
accuracy of the information that was requested by the auditor. The external parties typically include banks,
suppliers, customers, and at times, solicitors.
3. Inspection: Inspection is the auditor’s examination of the client’s documents and records to substantiate the
information that is, or should be, included in the financial statements. Some examples include invoices from
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 suppliers, payment vouchers, and bank statements. Upon making a payment based on an invoice from a supplier,
the client will have a payment voucher as a record and also a bank statement to trace the cash outflow.
4. Analytical procedures: Analytical procedures consist of evaluations of financial information through analysis of
plausible relationships among financial and non-financial data. For example, an auditor may compare the gross
margin percentage in the current year with the preceding year’s.
5. Inquiries of the client: Inquiry is the obtaining of written or oral information from the client in response to
questions from the auditor.
6. Recalculation: Recalculation involves rechecking a sample of calculations made by the client. A considerable
portion of auditors’ recalculation is done by computer-assisted audit software.
7. Reperformance: Reperformance is the auditor’s independent tests of client accounting procedures or controls that
were originally done as part of the entity’s accounting and internal control system. Whereas recalculation involves
rechecking a computation, reperformance involves checking other procedures. For example, the auditor may
compare the price on an invoice to an approved price list or may reperform the aging of accounts receivable.
8. Observation: Observation consists of looking at a process or procedure being performed by others. Observation is
rarely sufficient by itself because of the risk of client personnel changing their behavior because of the auditor’s
presence.
3. a. Explain management and auditors’ responsibility for the financial statement being audited.
For auditing, management has some responsibility to provide and help the auditors for auditing. they are as follow
consequently-
1. The financial statements are the management's responsibility. The auditor's responsibility is to express an opinion
on the financial statements.
2. Management is responsible for adopting sound accounting policies and for establishing and maintaining internal
control. The auditor's knowledge of these matters and internal control is limited to that acquired through the audit.
3. The fair presentation of financial statements in conformity with generally accepted accounting principles is an
implicit and integral part of management's responsibility. The independent auditor may make suggestions about
the form or content of the financial statements or draft them, in whole or in part, based on information from
management during the performance of the audit.
4. Management’s responsibility to answer the required response made by the auditor. There auditor’s responsibility
is to investigate fraud and error.
5. Management should not restrict free access to audits. Auditors should make an opinion on restrictions.
However, the auditor's responsibility for the financial statements he or she has audited is confined to the expression
of his or her opinion on them.
b. Discuss the major factors in today's society that have made the need for an independent audit.
An independent auditor is typically used to avoid conflicts of interest and to ensure the integrity of performing an
audit. Independent auditors are often used or even mandated to protect shareholders and potential investors from
the occasional fraudulent or unrepresentative financial claims made by public companies. The auditor develops an
opinion asserting the reliability and fairness of clients' financial statements, then communicates the information to
investors, creditors, and government organizations. Thus it makes information much reliable and fair to take
decisions.
c. What are the threats of Independence faced by the auditors to conduct an Audit.
1. Self-Interest Threat: The self-interest threat stems from the auditor’s interests clashing with that of the client In
that case, they may neglect other stakeholders’ needs when their interest is at stake.
2. Self-Review Threat: The self-review threat stems from the relationship that auditors have with clients. Some
auditors provide additional services, apart from their primary auditing service. For example, some auditors provide
account preparation or tax services. The self-review threat is when auditors are responsible for auditing their
previous work.
3. Familiarity Threat: The familiarity threat also arises from the relationship that auditors have with their clients.
Throughout a long relationship with a client, the auditors may become too familiar with the client’s management.
The longer this association between both parties is, the higher the familiarity threat for the engagement will be.
The familiarity threat is also avoidable. By not having long relationships with clients or rotating audit teams after
regular intervals, auditors can avoid it.
4. Intimidation: auditors may also get direct threats from the client. Usually, these threats arise when the client is in
a position of leverage against the auditors. In these cases, the client may threaten the auditor. This threat
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 represents the intimidation threat that auditors face during their audit engagements. Like other threats,
intimidation poses a risk to the auditors’ independence and objectivity. Intimidation threats can be severe
sometimes. In these cases, auditors must leave the engagement readily.
5. Advocacy Threat: The advocacy threat to independence arises when auditors are in a position where they
represent the client. This threat may also arise from a client’s relationship with the auditors. Auditors can avoid it
by segregating their teams for each task. In some cases, auditors may have to choose between representing the
client and continuing audit engagements.

d. Define audit sampling. Discuss the selection method that IS available in sampling.
Audit sampling is the use of an audit procedure on a selection of the items within an account balance or class of
transactions.
ISA 530 recognizes that there are many methods of selecting a sample, but it considers five principal methods of audit
sampling as follows:
• random selection
• systematic selection
• monetary unit sampling
• haphazard selection, and
• Block selection.
Random selection
This method of sampling ensures that all items within a population stand an equal chance of selection by the use of
random number tables or random number generators. The sampling units could be physical items, such as sales
invoices or monetary units.
Systematic selection
the method divides the number of sampling units within a population into the sample size to generate a sampling
interval. The starting point for the sample can be generated randomly, but ISA 530 recognizes that it is more likely to
be ‘truly’ random if the uses of random number generators or random number tables are used. Consider the
following example:
Monetary unit sampling
The method of sampling is a value-weighted selection whereby sample size, selection, and evaluation will result in a
conclusion in monetary amounts. The objective of monetary unit sampling (MUS) is to determine the accuracy of
financial accounts.
Haphazard sampling
When the auditor uses this method of sampling, he does so without following a structured technique. ISA 530 also
recognizes that this method of sampling is not appropriate when using statistical sampling (see further in the article).
Care must be taken by the auditor when adopting haphazard sampling to avoid any conscious bias or predictability.
The objective of audit sampling is to ensure that all items that make up a population stand an equal chance of
selection. This objective cannot be achieved if the auditor deliberately avoids items that are difficult to locate or
deliberately avoids certain items.
Block selection
This method of sampling involves selecting a block (or blocks) of contiguous items from within a population. Block
selection is rarely used in modern auditing merely because valid references cannot be made beyond the period or
block examined. In situations when the auditor uses block selection as a sampling technique, many blocks should be
selected to help minimize sampling risk.

4.
a.How an audit firm will determine whether a new client is likely to be high or low risk to the form in terms of
being able to draw an appropriate Assurance conclusion about the client? What are the sources of information
about a new client?
Before accepting a new client relationship, a professional accountant in public practice shall determine
1. Whether acceptance would create any threats to compliance with the fundamental principles. Potential threats
to integrity or professional behavior may be created from, for example, questionable issues associated with the
client (its owners, management or activities).’ This means that when approached to take on a new client, the firm
should investigate the potential client, its owners, and business activities in order to evaluate whether there are
any questions over the integrity of the potential client which creates unacceptable risk. These investigative actions
are usually performed as ‘know your client/customer’ or ‘customer due diligence’ procedures, which are also
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 carried out in order to comply with anti-money laundering regulations.

Once a client has been accepted, the firm should consider the suitability of the specific engagement it has been
asked to perform. In particular there may be ethical threats which mean that the engagement should not be
accepted, in particular, whether there are any threats to objectivity. Potential threats could arise for example, if
members of the audit firm hold shares in the client or there are family relationships. If threats are discovered, it
may not mean that the client must be turned down, as safeguards could potentially reduce the threats to an
acceptable level.

There may be other ethical matters to evaluate about a potential new engagement, for example, whether any
conflict of interest or confidentiality issues could arise, and if so, whether appropriate safeguards can be put in
place. Also, the firm’s competence to perform the potential work should be evaluated, especially if the potential
client operates in a specialised industry, or if the client has a complex structure. A self-interest threat to professional
competence and due care is created if the engagement team does not possess, or cannot acquire, the competencies
necessary to properly carry out the engagement. Practical matters such as the resources needed to perform the
work, the deadline for completion, and logistics like locations and geographical spread will have to be looked into
as well.

These matters need to be evaluated in the specific context of the potential engagement and should be fully
documented. Different types of potential engagement will give rise to different matters that should be evaluated.
For example, if the firm is asked to perform the audit of a large group of companies with operations in many
countries, then resourcing the audit may be the most significant issue. The fee may be large, leading to a self-
interest threat of fee dependence. On the other hand, if asked to perform the audit of a small owner-managed
company, fee dependence is less likely to be an issue, but threats potentially created by the auditor appearing to
make management decisions could be significant. In answering requirements on client and engagement
acceptance, candidates are warned that their comments must be made specific to the scenario presented to them
to pass the requirement.

Commercially, an engagement should be profitable to make it worthwhile for the firm. But the firm must take care
that commercial considerations do not outweigh other matters to be considered.

IFAC’s Code makes it clear that acceptance decisions are not to be treated as a one-off matter. The Code states: ‘It
is recommended that a professional accountant in public practice periodically review acceptance decisions for
recurring client engagements.’ Changes in the circumstances of either the client or the audit firm may mean that
an engagement ceases to be ethically or professionally acceptable or creates a heightened level of risk exposure.
Therefore, client continuance assessments are important and should be fully documented.

b.What do you mean by sufficient appropriate audit evidence? Explain how does an audit accesses the degree of
Reliability of audit evidence?
In the audit context, the “sufficient” usually refers to the quantity while the “appropriate” usually refers to the
quality. In this case, sufficient appropriate audit evidence means that auditors need to obtain several audit
evidence and the quality of such evidence should meet the acceptable auditing standards.
An audit accesses the degree of Reliability of audit evidence when it is obtained
(1) From an independent provider,
(2) From a client with effective internal controls,
(3) From the auditor’s direct knowledge,
(4) From qualified providers such as law firms and banks,
(5) From objective sources, and
(6) Promptly
c. According to schedule C of the ICAB code of ethics account should follow certain rules before accepting the new
appointment. What are they?

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d. Describe the factors that audit firms should consider when determining whether to accept and engagement.
Draw a flowchart of the auditor’s appointment decision.
An engagement letter is an agreement between the public accounting firm and the client concerning the conduct
of the audit and related services. It should state what services will be provided, whether any restrictions will be
imposed on the auditor’s work, deadlines for completing the audit, and assistance to be provided by client
personnel. The engagement letter also informs the client that the auditor is not responsible for the discovery of
fraud.
Before accepting a client, the auditor should investigate the client. The primary purpose is to evaluate the integrity
of the client and the possibility of management fraud. The auditor should be especially concerned with the
possibility of management fraud since it is difficult to uncover. The auditor does not want to needlessly expose him-
or herself to the possibility of a lawsuit for failure to detect such fraud.

5
a. Describe the fundamental principles of ethics prescribed in the IFAC Code.
b.Define i. Independence of mind ii. Independence in appearance iii. What are the threats to
auditor's Independence and safeguards to these threats?
i. Independence of mind is the state of mind that permits a member to perform an attest service
without being affected by influences that compromise professional judgment, thereby allowing
an individual to act with integrity and exercise objectivity and professional skepticism.
ii. Independence in appearance—the auditor’s ability to maintain an unbiased viewpoint in the eyes
of others.
iii. 1. Self-Interest Threat: The self-interest threat stems from the auditor’s interests clashing with
that of the client In that case, they may neglect other stakeholders’ needs when their interest is
at stake.
2. Self-Review Threat: The self-review threat stems from the relationship that auditors have with
clients. Some auditors provide additional services, apart from their primary auditing service. For
example, some auditors provide account preparation or tax services. The self-review threat is
when auditors are responsible for auditing their previous work.
3. Familiarity Threat: The familiarity threat also arises from the relationship that auditors have
with their clients. Throughout a long relationship with a client, the auditors may become too
familiar with the client’s management. The longer this association between both parties is, the
higher the familiarity threat for the engagement will be. The familiarity threat is also avoidable.
By not having long relationships with clients or rotating audit teams after regular intervals,
auditors can avoid it.
4. Intimidation: auditors may also get direct threats from the client. Usually, these threats arise
when the client is in a position of leverage against the auditors. In these cases, the client may
threaten the auditor. This threat represents the intimidation threat that auditors face during their
audit engagements. Like other threats, intimidation poses a risk to the auditors’ independence
and objectivity. Intimidation threats can be severe sometimes. In these cases, auditors must leave
the engagement readily.

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 5. Advocacy Threat: The advocacy threat to independence arises when auditors are in a position
where they represent the client. This threat may also arise from a client’s relationship with the
auditors. Auditors can avoid it by segregating their teams for each task. In some cases, auditors
may have to choose between representing the client and continuing audit engagements.
b. The auditor’s working papers usually can be provided to someone else only with the permission of the client. Give
three exceptions to this general rule.
c. Many people believe that a chartered accountant as an auditor cannot be truly independent when payment of
field is dependent on the management of the client. Do you agree? Explain your reasoning.
Many people believe that a CPA cannot be truly independent when payment of fees is dependent on the
management of the client. After accepting an engagement, a CPA discovers that the client’s industry is more
technical than he realized and that he is not competent in certain areas of the operation.
d. Assume that a partner of a chartered accountant firm owns shares of stock of a large audit client. Ownership is a
significant part of this total wealth. Has he violated the code of professional conduct? Why or why not?

6.
a. Distinguish between fraudulent financial reporting and misappropriation of the assets.
Fraudulent financial reporting occurs when there is an intentional misstatement of amounts or disclosures in the
financial statements with the intent to deceive users of those statements. Misappropriation of assets involves the
theft of assets such as cash or inventory.
Fraudulent financial reporting is the intentional misrepresentation of a firm’s financial statements to give investors
a mistaken impression about the firm’s operating performance and profitability.
Fraudulent financial reporting takes place in the context of earnings management. The management changes the
accounting policies, or the way estimates are calculated with the intention to improve the firm’s results.
Fraudulent financial reporting occurs due to:
1. personal incentives
2. pressures from the market
3. lack of ethics
4. deliberate compliance with the projections of financial analysts
5. attempts to affect the price of the stock
Eg. Inflated sales, passing fictitious journal entries particularly near the balance sheet date, or nonrecording of
certain expenses to inflate profit, etc.
Misappropriation of assets happens when people who are entrusted to manage the assets of an organization steal
from it or misuse the asset for personal use. Asset misappropriation involves third parties or employees in an
organization who abuse their position to steal from it through fraudulent activity. It can also be known as insider
fraud.
Eg. A Sales clerk not accounting for cash sales and pocketing the cash; taking home office stationery such as pens,
paper clips; accounts payable clerk issuing payments to a fictitious organization under the control of such a clerk or
mutual tie-in agreements, etc.

b. What is meant by management assertions about financial statements? Identify and briefly explain the five
broad categories of Management assertions.
Management assertions or financial statement assertions are the implicit or explicit assertions that the preparer of
financial statements (management) is making to its users. It includes the recognition, measurement, presentation,
and disclosure of the financial information inside the statements. Management assertions are usually used for the
audit of a company’s financial statements.
The PCAOB describes five categories of management assertions:
(1) existence or occurrence;
(2) completeness;
(3) valuation or allocation;
(4) rights and obligations;
(5) presentation and disclosure.

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 c. What is meant by planned detection risk? What is the effect on the amount of evidence that auditors must
accumulate when plant destruction risk is increased from medium or high?
Planned detection risk is the risk that audit evidence will fail to detect misstatements that exceed a tolerable
amount. When an auditor reduces the planned detection risk, this will require the collection of more evidence.
When the inherent risk is increased from medium to high, the auditor should increase the audit evidence
accumulated to determine whether the expected misstatement occurred.
d. Identify factors that make for High inherent risk in the audit. Explain why inherent risk is set for segment rather
than for overall audit?
Inherent Risk Factors
• Susceptibility to theft or fraudulent reporting.
• Complex accounting or calculations.
• Accounting personnel's knowledge and experience.
• Need for judgment.
• Difficulty in creating disclosures.
• Size and volume of accounts balance or transactions.
• Susceptibility to obsolescence.
• Prior year period adjustments.

2018
1.
a.Define auditing. Identify the major causes of information risk and explain the importance of auditing in reducing
information risk.
The audit is a systematic process of (1) objectively obtaining and evaluating evidence regarding assertions about
economic actions and events to ascertain the degree of correspondence between those assertions and established
criteria and (2) communicating the results to interested users.
Objectives of Audit:
1. To express an opinion on management assertion
2. Prevent and detach the error material misstatement
See above…
B. Describe Assurance services and distin audit serve services from other Assurance and non-Assurance services
provided by CPAs.
An assurance service is an independent professional service that improves the quality of information for decision-
makers. Such services are valued because the assurance provider is independent and perceived as being unbiased
concerning the information examined. Individuals who are responsible for making business decisions seek
assurance services to help improve the reliability and relevance of the information used as the basis for their
decisions.
The notable differences between audit and assurance are as follows:
1. Audit is a procedure of closely monitoring the accounting information provided in a company’s financial
statements. Assurance, on the other hand, involves assessing and analyzing different operations, processes,
and procedures.
2. Another key difference between audit and assurance services relates to the basic aims of these procedures.
The audit ensures that the financial reports are presented fairly, ethically, accurately, and comply with the
accounting standards/principles. Assurance evaluates the accuracy in given financial reports/records and
conveys the authenticity of such information to all stakeholders.
3. An auditor owns extended rights, which help to access any kind of information. On the contrary, assurance
auditor is provided with fewer rights, as this process relates to a specific area in the company’s financial
records.
4. Audit requires more time and resources as compared to assurance services.
5. Audit is the first step, whereas the assurance procedure starts once the audit is complete.
6. Audit is a way to disclose any fraudulent or dishonest activity i.e misuse of the fund or misrepresentation of
facts. Assurance provides authentic information to the stakeholders, which helps in reaching a better
decision.
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 Audit Assurance
It involves the evaluation of the accounting information Assurance is a way to analyze and assess the
available in financial statements. procedures, operations, and processes.
The basic aim is to present fair and accurate financial It ensures that the presented accounting information
information that also follows accounting principles and is accurate. Meaning thereby, there are no
standards. misrepresentations or irregularities in such a report.
The audit is performed under international auditing The practitioner may restrict to a specific area due to
standards. the assurance terms.
All stakeholders of a company are engaged Assurance may restrict to one type of stakeholder
Resources and time necessary for conducting an audit are Resources and time required for assurance are
relatively higher relatively lower
Audit points out any dishonest activity or misuse of the Assurance is done after the audit and provides
funds in financial statements essential information for better decision-making.
c. Differentiate the three main types of audits. Describe the requirement for becoming a CPA.
Types of Audits
Audits of Financial Statements: A financial statement audit is conducted to determine whether the financial
statements (the information being verified) are stated by specified criteria.
Compliance Audits: A compliance audit is conducted to determine whether the auditee is following specific
procedures, rules, or regulations set by some higher authority.
Operational Audits: An operational audit evaluates the efficiency and effectiveness of any part of an organization’s
operating procedures and methods.
Uniform CPA Exam is one of the “Three E's” – Education, Examination, and Experience – that are required for
licensure as a CPA.
2
a.Specify the condition required to issue the standard unqualified audit report.
The standard unqualified audit report is issued when the following conditions have been met:
1. All statements—balance sheet, income statement, statement of changes in stockholders’ equity, and statement
of cash flows—are included in the financial statements.
2. Sufficient appropriate evidence has been accumulated, and the auditor has conducted the engagement in a
manner that enables him or her to conclude that the audit was performed by auditing standards.
3. The financial statements are presented by the U.S. generally accepted accounting principles or another
appropriate accounting framework. This also means that adequate disclosures have been included in the footnotes
and other parts of the financial statements.
4. no circumstances are requiring the addition of an explanatory paragraph modification of the wording of the
report.
b. Identify the types of audit reports that can be issued when an unqualified opinion is not justified.
There are 3 kinds of audit reports when an unqualified opinion is not justified.

c. Define materiality as it is used in the audit reports. What conditions will affect the auditor’s determination of
materiality?
Materiality is a concept that defines why and how certain issues are important for a company or a business sector
for taking decisions. Materiality is an essential consideration in determining the appropriate type of report for a given
set of circumstances. For example, if a misstatement is immaterial relative to the financial statements of the entity for

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 the current period, it is appropriate to issue an unqualified report. A common instance is the immediate expensing of
office supplies rather than carrying the unused portion in inventory because the amount is insignificant.

1. Materiality Decisions—Non-GAAP Condition- When a client has failed to follow GAAP, the audit report will be
unqualified, qualified opinion only, or adverse, depending on the materiality of the departure.

3. dollar amounts compared with a base- The primary concern in measuring materiality when a client has failed to
follow GAAP is usually the total dollar misstatement in the accounts involved, compared with some benchmark or base.

3. Measurability The dollar amount of some misstatements cannot be accurately measured.

4. Nature of the Item The decision of a user may also be affected by the kind of misstatement i.e., Transactions are
illegal or fraudulent., materially affect some future period, even though it is immaterial when only the current period
is considered.

5. Materiality Decisions—Scope Limitations Condition When there is a scope limitation in an audit, the audit report
will be unqualified, qualified scope and opinion, or disclaimer, depending on the materiality of the scope limitation.
d. Describe what is meant by reports involving the use of other auditors. What are the three-opinion available to
the primary auditory responsible for the opinion and when should each be used?
An audit report is a written opinion of an auditor regarding an entity's financial statements. The report is written in
a standard format, as mandated by generally accepted auditing standards (GAAS).
The three-opinion available to the primary auditory responsible for the opinion and when should each be used-
1. Qualified audit opinion
2. Adverse audit opinion and
3. Disclaimer audit opinion

3.
a. In what ways can the profession positively respond to and reduce liability in auditing?
b.Define what is meant by a management assertion about financial statements. Identify the three broad
categories of Management assertions.-answered in prior.
b. Explain the auditor’s responsibility for discovering material misstatement due to fraud or error and the need of
maintaining professional skepticism when contacting the audit.
4
a.Explain what is meant by reasonable Assurance and why assurance is important in auditing.
Reasonable assurance refers to the auditor's degree of satisfaction that the evidence obtained during the
performance of the audit supports the assertions embodied in the financial statements.
Assurance services are aimed at improving the quality of information for the individuals making decisions. Providing
independent assurance is a way to bring comfort that the information on which one makes decisions is reliable, and
therefore reduces risks, in this case, information risk.
b.Distinguish inherent risk, control risk, and Audit risk.
Inherent Risk vs Control Risk
Inherent risk is the raw or untreated risk, i.e., the natural level Control risk is the probability of loss resulting
of risk intrinsic in a business activity or process without from the malfunction of internal control
implementing any procedures to reduce the risk. measures implemented to mitigate risks.
Nature
Inherent risk is inevitable. Control risk only arises in the absence of
effective internal control measures.
Mitigation of Risks
Inherent risk can be mitigated via the implementation of Control risk can be mitigated via the effective
internal controls. functioning of internal controls.

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c.What are the threats of Independence faced by the auditors to conduct an audit?
d. Differentiate between auditing and accounting.
Difference between Accounting and Auditing with the comparison chart
Criterion Accounting Auditing
Definition Accounting is keeping records of the Auditing is a critical examination of the financial
financial transactions and preparing statements to give an opinion on their fairness
financial statements
Timing Continuous with a daily recording of Periodic process and carried out after the
financial transactions preparation of final accounts
Beginning Starts where book-keeping ends Starts where accounting ends.
Period Concentrates on the current financial Concentrates on the past financial statements
transactions and activities
Coverage All transactions, records, and statements Final financial statements and records.
having financial implications

Level of Detail Very detailed and captures all details
related to financial transactions and
records
Type of Checking Checking details related to all financial
records
Focus To accurately record and present all
financial transactions and statements.
Uses financial statements and records on a
sample basis.
Carried out through test checking or sample
checking.
To verify the accuracy of the financial statements

Objective To determine the financial position, To add credibility to the financial statements
profitability, and performance.

Legal Status Governed by Accounting Standards Governed by Standards on Auditing

Performed by Accountants Auditors.
Status Carried out by an internal employee Carried out by an external person or independent
agency
Appointment By the management By the shareholders
Qualification Specific qualification is not compulsory Some specific qualification is compulsory

Remuneration Type Salary Auditing fee

Remuneration Fixation By the management By the shareholders
Scope Determination by the management by the relevant laws

Necessity Necessary for all organizations in the day- Not necessary in the day-to-day operations
to-day or routine operations

Deliverables Financial statements e.g., Income Audit Report

Statement or P/L, Balance Sheet, Cash
Flow Statement, etc.
Report Submission To the management To the shareholders
Guidance Accountants may make suggestions for the Auditor usually does not make suggestions
improvement of accounting and related
activities
Liability Generally, ends with the preparation of the Liability after preparation and submission of the
accounts audit report
Shareholders’ The accountant does not attend Auditor may attend
Meetings

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 Professional An accountant is not usually prosecuted An auditor can be prosecuted for professional
Misconduct for professional misconduct misconduct

Removal By the management By the shareholders

5
a. Discuss the nature and purpose of audit documentation.
b. Discuss the relationship between material ATI and order trees according to BSA 320.
c. Mention the standards of reporting under the Generally Accepted auditing standards.
d. Most audit evidence is persuasive rather than conclusive- justify the statement.
Audit evidence is typically persuasive rather than conclusive because of the way that it is collected and the
results that it gives. Rather than be absolute, auditors prefer to be reasonable in their assurance. This means
that they will collect evidence from several different sources to support the same assertion. In comparison
to conclusive evidence, auditors will not examine all of the information available to them when collecting
their persuasive evidence. They can draw reasonable conclusions and arguments about a financial statement
assertion by using a variety of means of collecting data.

The persuasive evidence is collected using a combination of sufficiency and appropriateness. The two are
interrelated and apply to audit evidence that is collected either through substantive procedures or tests of
control. While sufficiency measures the quantity of audit evidence, appropriateness measures its quality and
reliability as well as its relevance. When seeking audit evidence from tests of control, auditors need to
consider the sufficiency and appropriateness of the audit evidence to support the assessed level of control
risk. If the audit evidence is being acquired from substantive procedures, auditors need to consider the
extent to which the evidence, alongside any other evidence from tests of control, supports the relative
financial statement assertions.

The judgments made by an auditor about how sufficient or appropriate evidence are dependent on several
factors. These include; the materiality of the item being examined, the source and reliability of the
information available, the experience gained during previous audits, the findings of the audit procedures,
the assessment and of the nature and degree of risk of misstatement, and the nature of the accounting and
the internal control systems.
For all of these reasons, audit evidence is therefore typically persuasive rather than conclusive. The main
aim of audit evidence is to be reasonable and not necessarily absolute.

For the above reasons, it is said that Audit evidence is persuasive rather than conclusive

6.
a. Write an imaginary auditor’s report on behalf of DBH Limited for the year ended 30 June 2017 as you are the
auditor of the company for the time.
b. How can an auditor verify the Goodwill of a company?
To verify the value of goodwill auditor has to examine the purchase agreement. The auditor should find out from
the purchase agreement that the amount of this asst is correct. Goodwill usually appears in the balance sheet at
cost. There is no legal compulsion to write it.
c. How the auditor can identify and assesses the risk of material misstatement due to fraud according to BSA 240.
d. Explain the purpose of developing international standards on Auditing.

2017
1
a. What are the differences between the audit of financial statements, compliance Audit, and operational audit?
Basis audit of financial operational audit compliance audit
statements

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 Meaning To determine whether the To evaluate whether To determine whether the
overall financial
operating procedures are client is following specific
statement is presented by efficient and effective procedures set by higher
specified criteria. authority.
Users of report External entities Management Authority setting down
procedures-internal or
external
Nature Highly Standardized Highly non-Standardized Non-standardized but
often subjective specific and usually
objective.
Performed by Almost Universally Frequently Occasionally
Information Taken From Financial From payroll, cost of the From the company’s
Statements department record
Established Criteria GAAP Standards for efficiency Loan agreement
and effectiveness provisions.

Identify the most important reasons for performing a physical examination.

b. The first standard of fieldwork requires the performance of the audit by a person having technical training and
proficiency as an auditor. What are the various ways in which auditors can fulfill the requirement of the standards?
c. Explain what is meant by determining the degree of correspondence between the information and establishing
criteria?
2.
a. Compare and contrast among engagement letter, Management representation letter, and management letter or
management report.
b. What are the steps of analytical procedures? How analytical procedures may help to plan the audit?
c. BSA 315 indicates some factors that might indicate that is a significant risk may occur. What are those factors?
3
a. What is a working paper? Main from the elements of the working paper.
Working papers are the record kept by auditors of procedures applied, tests performed the information obtained
and pertained consultation reached in engagement. Audit working papers refer to the documents prepared by or
used by auditors as part of their works. Those documents include summarizing the client's nature of the business,
business process flow, audit program or procedure, documents or information obtained from the client, and audit
testing documents.
b. Distinguish between integrity, objectivity, and independence.
c. What are the threats of Independence faced by the auditors to conduct an audit?
d.Define audit sampling. Discuss the selection method that is available in sampling.
4.
a. Discuss the nature and purpose of audit documentation.
Audit documentation is the record of procedures performed, evidence obtained, and conclusions reached as part
of an audit. ... It represents a better level of quality control over an audit. It shows auditors in later years how the
audit was conducted. It can be used as a training tool for junior auditors.
b. Discuss the relationship between materiality and audit risk.
There is an inverse relationship between materiality and the level of audit risk, that is the higher the materiality
level, the lower the audit risk, and vice versa. ... For example, if the audit is planned before the period end, auditors
anticipate the results of operations and the financial position.
c. Mention the general standards under the Generally Accepted auditing standards.
A. General Standards
1. Adequate technical training and proficiency
2. Independence in mental attitude
3. Due to professional care
B. Standards of Fieldwork
4. Adequate planning and proper supervision
5. Understanding the internal control structure
6. Obtaining sufficient competent evidential matter

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C. Standards of Reporting
7. Financial statements presented by GAAP
8. Consistency in the application of GAAP
9. Adequacy of informative disclosure
10. Expression of opinion

a. Define fraud. List some examples of risk factors relating to misstatements arising from fraudulent financial
reporting.
Fraud is defined as an intentional misstatement of financial statements. Fraud in audits is when an entity is found to
have illegally altered financial statements to manipulate its financial health or to hide profit or losses. It is
severely punished since fraud undermines the trust that is the bedrock of the global financial system.

a. What is internal control? How the understanding and testing of the internal control systems may help
auditors?
Internal controls are the mechanisms, rules, and procedures implemented by a company and its management to
ensure the integrity of financial and accounting information, promote accountability, and prevent fraud.
Importance of Internal Control-
1. Internal Controls help to understand and mitigate risks.- Understanding risks will help you to determine if
there are adequate controls to mitigate the risks in those areas.
2. Internal Controls help to address financial statement assertions.- One of the purposes of internal controls
is to safeguard the organization’s assets and thus address financial statement assertions (existence, rights,
completeness, and accuracy). A familiar example is performing a physical count of inventory used internally by all
organizations. Count inventory and track them in the accounting system to ensure their existence. Count cash receipts
in retail sales before recording them to verify accuracy.
3. Internal Controls help to prevent and detect fraud.
4. Internal controls help to prevent misstatement of financial statements.- Internal controls help to prevent
errors and misstatement of financial statements.
5. Internal controls help to establish company practices.
b. What are the limitation of internal control?
1. Reasonable Assurance- the biggest limitation of internal control is that it does not provide reasonable assurance.
Internal controls are effective in preventing, detecting, and rectifying problems. However, they do not detect and
prevent all the cases in which problems may exist.
2. Collusion by Two Or More Employee
One of the most common internal controls that companies utilize is the segregation of duties. It allows them to use
various employees in a process to ensure an individual employee cannot commit fraud. However, employees may
still go around this type of control by teaming with others in the process and concealing their frauds. By colluding
with others, employees can easily render segregation of duties ineffective.

3. Human Error- some internal controls may validate human input, they cannot possibly detect every instance when
a human error may occur. Therefore, internal control does not work well when there is a chance of a human error
occurring during the process.
4. Inappropriate Management Override Of Controls- internal controls have an inherent limitation when it comes to
overriding control. The control environment of a company dictates how its management and employees see internal
controls. If the management of a company overrides the internal control systems in place, then having these systems
is futile.
5. Poor Or Improper Judgment From Management- Usually, the management of a company makes decisions based
on the information provided to them. if the information is not adequate, it may end up in the wrong decisions from
the management. Judgment is a vital part of internal control systems.
Many companies base their internal controls on professional judgment. If these judgments are compromised, they
may end up in a company using the wrong internal control systems, which results in an ineffective process.

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6. Cost And Benefit Consideration- Full implementation of control as well as prop segregation of duties require a
high cost to carry out. Thus, sometimes the costs may outweigh the benefits; especially for small companies.
7. Improper Communication Or Training- it may occur due to improper communication with employees about their
roles in the internal control systems. Furthermore, improper training to employees about internal control systems
may also limit its effectiveness.
8. Unforeseen Circumstances- However, the management cannot foresee all possible problems or circumstances.
There will always be random variables or events that can render internal controls futile.
c. What is an internal audit? What do internal auditors do?
Internal audit is an independent appraisal function that is established by the management of an organization for
the review of its internal control system as a service to the organization.
1. Provides an independent, unbiased assessment of organization operations.
2. Provides management with information on the effectiveness of risk management, control, and governance
processes.
3. Acts as a catalyst for improvement in risk management, control, and governance.
4. an adviser that tells management what it needs to know when it needs to know it.

6.
a. Is there any need for Ethical standards for professional accountants? Do you prefer rules-based or principles-
based guidance? Justify your preference.
Obviously, A professional accountant should be straightforward and honest in all professional and business
relationships. A professional accountant should not allow bias, conflict of interest, or undue influence of others to
override professional or business judgments. Ethics require accounting professionals to comply with the laws and
regulations that govern their jurisdictions and their bodies of work. Avoiding actions that could negatively affect
the reputation of the profession is a reasonable commitment that business partners and others should expect. So
there is a must of Ethical Standards.
a. What is the fundamental principle of the IFAC code of ethics?
The fundamental principles within the Code –
1. integrity, 2. objectivity, 3. professional competence and due care, 4. Confidentiality, and 5. professional
behavior
C.What do you mean by confidentiality in Assurance engagement? How would you create and use a Chinese wall
to maintain confidentiality?
The information should not hand to people that are not authorized to access it is referred to as confidentiality. It is
one of the most important of internal audit's code of ethics that required the internal auditors to keep information
that they obtain from clients during their audit confidential.
The term Chinese wall, as it is used in the business world, describes a virtual barrier intended to block the exchange of
information between departments.
To set a Chinese wall first we should ensure that all members of the two advisory teams or groups within the firm are
aware of the rules concerning client confidentiality. Consider issuing written guidelines. Place the two advisory teams
in separate buildings or place one team in a part of a building with restricted access to restrict the exchange of
information.
2016
1

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a.Distinguish between the following- i. Assurance services and attestation service.
ii. Audit and review.
basis Review Audit
Level of Assurance Lower for a review Higher for an audit
Reliance on It begins with the account balance being It begins with the account balance being
Management provided by the management, however, only a provided by the management. The auditor
tiny amount of this information will be tested. in question will then proceed to test a
significant amount of this information.
Understanding of the Isn’t in any way involved with testing the Must test the internal control of the
Internal Control internal control. underlying client.
Work Performed A review is less taxing and can, therefore, be An audit is taxing and has a long list of
conducted within a few hours. procedures to be followed. It takes a
significant amount of hours (usually days)
to complete an audit.
Price The cost of conducting a review is relatively The cost of hiring an auditor is relatively
cheaper, which makes it affordable to small high, and therefore less affordable to small
companies. companies.
Report Provided A conclusion is always provided, but in a Opinions are expressed, but in a positive
negative form, e.g. nothing has been brought form, e.g. these financial statements are
to our attention, that would make us believe completely free of material misstatement.
these financial statements aren’t free of
material misstatement.

b.What is internal control? The control environment is the umbrella for internal control, do you agree? What are
the components of internal control? Explain with illustrations.
Internal controls are the mechanisms, rules, and procedures implemented by a company and its management to
ensure the integrity of financial and accounting information, promote accountability, and prevent fraud.
The components of internal control are- components of C.R.I.M.E. –
1 control environment,
2. risk assessment,
3. information and communication,
4. monitoring activities, and
5. existing control activities
c.Distinguish between compliance audit and operational audit with proper illustrations. See previous.
2.
a. What do you mean by integrity, objectivity, and independence in Assurance engagement?
Integrity means being honest and having strong moral principles. It is the practice of being honest and showing a
consistent and uncompromising adherence to strong moral and ethical principles and values. Examples-, informing
a cashier that they gave you too much change and going back to the store to pay for something you forgot to pay
for are two examples of showing integrity in everyday circumstances.
Objectivity is an unbiased mental attitude that allows internal auditors to perform engagements in such a manner
that they believe in their work product and that no quality compromises are made. Objectivity requires that internal
auditors do not subordinate their judgment on audit matters to others.
b. What do you understand by the independence of mind and independence in appearance? Differentiate these
two terminologies used in Assurance engagement.- answered in previous
a. The ABC and company and audit firm, is currently in the process of accepting a new client. A review Team is
considering several ethical issues that might hind the acceptance. Write down the meaning, trade types, and
applicable safeguards for the following trade as per the following format.
Threat Meaning Threat type Applicable safeguards

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 Some firms tendered low billing

Assurer is providing valuation service to the same client

Assurer required senior management for the client

The client is proposing a contingent fee

The client threatens to sue the Assurance firm

Assurer accepts gifts and Hospitality from the client

Extra Notes
The Sarbanes-Oxley Act (SOX)
The Sarbanes-Oxley Act of 2002 was passed after Enron, WorldCom, and several other technology companies
collapsed due to accounting improprieties. The goal of SOX was to improve corporate governance and restore the
faith of companies' investors. However, many in the business world are against SOX, seeing it as a politically
motivated move leading to a loss of risk-taking and competitiveness.
Of concern to many is the mandate requiring that public companies obtain an independent audit of their internal
control practices. The cost of the requirement is felt most acutely by companies with a market capitalization of $75
million or greater. The audit standards were modified in 2007, reducing costs for many firms by 25% or more
annually.

Documentation
12. The auditor shall include in the audit documentation:
(a) The overall audit strategy;
(b) The audit plan; and
(c) Any significant changes made during the audit engagement to the overall audit strategy or the audit plan, and the reasons for such changes

Explain why the failure of financial statement users to differentiate between business failure, audit failure, and audit
risk has resulted in lawsuits.
Because of expectation-gap and lack of understanding of two concepts (following) accounting and legal professionals believe
that a major cause of lawsuits against CPA firms
1. The difference between a business failure and an audit failure
2. The difference between an audit failure and audit risk.

Audit failure—a situation in which the auditor issues an incorrect audit opinion as to the result of an underlying failure to
comply with the requirements of auditing standards
Audit risk—The risk that the auditor will conclude after conducting an adequate audit that the financial statements are fairly
stated and an unqualified opinion can therefore be issued when, in fact, they are materially misstated
Business failure—the situation when a business is unable to repay its lenders or meet the expectations of its investors because
of economic or business conditions.

PROTECTING INDIVIDUAL CPAs FROM LEGAL LIABILITY

Practicing auditors may also take specific action to minimize their liability. Some of the more common actions are as follows:
• Deal only with clients possessing integrity. There is an increased likelihood of having legal problems when a client lacks
integrity in dealing with customers, employees, units of government, and others. A CPA firm needs procedures to evaluate the
integrity of clients and should dissociate itself from clients found lacking integrity.
• Maintain independence. Independence is more than merely financial. Independence requires an attitude of responsibility
separate from the client’s interest. Much litigation has arisen from auditors’ too-willing acceptance of client representations or
client pressure. The auditor must maintain an attitude of healthy professional skepticism.
• Understand the client’s business. In several cases, the lack of knowledge of industry practices and client operations has been a
major factor in auditors failing to uncover misstatements.

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• Perform quality audits. Quality audits require that auditors obtain appropriate evidence and make appropriate judgments
about the evidence. It is essential, for example, that the auditor understands the client’s internal controls and modifies the
evidence to reflect the findings. Improved auditing reduces the likelihood of failing to detect misstatements and the likelihood of
lawsuits.
• Document the work properly. The preparation of good audit documentation helps the auditor perform quality audits. Quality
audit documentation is essential if an auditor has to defend an audit in court, including an engagement letter and a
representation letter that define the respective obligations of the client and the auditor.
• Exercise professional skepticism. Auditors are often liable when they are presented with information indicating a problem
that they fail to recognize. Auditors need to strive to maintain a healthy level of skepticism, one that keeps them alert to
potential misstatements, so that they can recognize misstatements when they exist.

The auditor is responsible for reasonable, but not absolute, assurance for several reasons:
1. Most audit evidence results from testing a sample of a population such as accounts receivable or inventory. Sampling
inevitably includes some risk of not uncovering a material misstatement. Also, the areas to be tested; the type, extent, and
timing of those tests; and the evaluation of test results require significant auditor judgment. Even with good faith and integrity,
auditors can make mistakes and errors in judgment.

2. Accounting presentations contain complex estimates, which inherently involve uncertainty and can be affected by future
events. As a result, the auditor has to rely on evidence that is persuasive, but not convincing.

3. Fraudulently prepared financial statements are often extremely difficult, if not impossible, for the auditor to detect, especially
when there is collusion among management.

Recent academic research on the topic of professional skepticism suggests there

are six characteristics of skepticism:1
1. Questioning mindset — a disposition to inquiry with some sense of doubt
2. Suspension of judgment—withholding judgment until appropriate evidence is obtained
3. Search for knowledge—a desire to investigate beyond the obvious, with a desire to corroborate
4. Interpersonal understanding—recognition that people’s motivations and perceptions can lead them to provide biased or
misleading information
5. Autonomy—the self-direction, moral independence, and conviction to decide for oneself, rather than accepting the claims of
others
6. Self-esteem—the self-confidence to resist persuasion and to challenge assumptions or conclusions
.

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