FILE 20201125 124759 auditing part 1 2 3

The auditor's report is a formal opinion, or disclaimer thereof, issued by either an internal auditor or an independent external auditor as a result of an internal or external audit, as

Question 1: Define the term auditing and its elements in the definition? Distinguish auditing and accounting ?

Definition of auditing:

“Auditing is a process in which independent and competent auditors collect and evaluate of evidence about audited information to determine and report on the degree of correspondence between the information and established criteria”

Elements of the definition of auditing:

- A process: include 3 phases: planning, implementing and completing

- Independent and competent auditors:

+ Independence in fact: maintains an unbiased attitude, follows the auditing

standards and obeys the law

+ Independence in appearance: shouldn‟t be influenced by the client‟s

interest and close relationships

+ Competence: qualification, skills, ethics and factors needed to effectively

manage and confirm the correctness of a company‟s accounting procedures

- Collect and evaluate of evidence: Evidence is any information or document

which is used by auditor to analyze, measure and draw conclusion based on

it Evidence must be sufficient and appropriate

- Audited information (=audit project): audited information can be

financial and non financial information

+ First, it is financial information which is presented on FSs

+ Second, it is operation information

+ Third, it is compliance information

- Established criteria: Ex: in FSs audit, established standards include:

accounting standards, regulations and law

- Reporting (=give opinion): it shows auditor‟s opinion about degree of

correspondence between information and established criteria

Distinguish auditing and accounting:

an organization and preparation of financial

Auditing means inspection of the books

of account and financial statements of

an organization

statements at the end of the financial year

To reveal the fact, that to which extent financial statement of an

organization gives true and fair view

Start Accounting starts where

Auditing is a periodic process

Question 2: Identify differences among internal audit, independent audit and state audit ?

Internal audit Independent

audit State audit

Organization

structure

Under the business owner

of the unit If the unit does not have the Board of Directors, the internal audit belongs to the Director If there is a Board

of Directors, the internal audit will be directly under

National, regional and international professional auditing firms and groups

Depending on each State, the state audit can

be under the National Assembly, the Court, the controlling institute, can

be under the Government,

or the president,

the Chairman

of the Board of Directors

Auditor

Internal auditors are the bosses who appoint and use

Are experts or professional independent auditors

Are the state auditors or government officials on duty

according to regulations

Conditions

to operation

According to the plan approved by the business owner, the unit, or according to the owner's

decisions, orders or requests

By contract or invitation to audit

According to the plan approved by the agency to which the state audit is affiliated, or

as determined

by the order, directive or request of the agency with which it operates

Audit fee

No audit fees Collecting audit

fees according to regulations and markets

No audit fees

Reporting

which it belongs

Legal value Has no legal

Question 3: Identify differences among FS audit, performance audit and compliance audit ?

Performace audit Compliance audit

Financial statement audit

Purpose

To evaluate the economy, effectiveness nd efficiency of the organization‟s operations and consulting

To consider and evaluate the audited firms comply the rules and regulation set

by some higher authorities and make

recommendation

To determine whether the overall the information being verified

in the financial statements are states in

accordance with specified

criteria

Subject

matter

Subject of performance audit can be various and diversified

The fact of compliance the regulations and law of competent state agencies and audited business

FSs (such as: balance sheet, income

statement, cash flow statement and notes) or interpretation of financial

statement of businesses

Standards

The regulations and law of competent state agencies and audited business

Accounting standards, law regulations and other related rules

Auditors 3 types of auditors 3 types of auditors 3 types of

Users as the business or business managers with audited

resulted, not to serve general users

Audit result will

be reported to the entity who hires the auditing firm

Question 4: What are the causes of information risk in the market economy ? List some ways to reduce information risk ?

- The causes of information risk in the market economy:

+ The big gap between the users and supplier of information and adjustment

of information which may benefit the supplier

+ The great volume of information

+ The increased complexity of information and economic activities

+ Incorrect treatment of information

- The three main ways to reduce information risk

+ User verifies the information

+ User shares the information risk with management or supplier of

information

+ User uses audited financial statements provided independent auditors

Question 5: List some functions and roles of auditing in the market economy? Function of auditing:

+ Firstly, examination and confirmation, or verification function This function is established together with the first introduction of auditing and developed rapidly until now

+ Secondly, consultancy functions The consulting function ranges from simple suggestions for improving the client‟s businesses more effectively to advice in their development strategies, and actuarial benefit consulting

The role of independent audit organization

+ The independent audit organization plays role as an independent party (third party) presenting examination and confirmation function, and gives an opinion about the true and fair view of audited information

+ The user information has reliance basis to give his decision suitably

+ The result of audit also helps audited entity to see themselves objectively

+ In addition, the audit consultation in the management letter will help top of

management to give the necessary adjustment in business as well as management task

The role of state audit:

State Audit organization plays role as management tool of the State, especially in expenditure State budget It helps to improve and strengthen management of State agencies, or organizations in compliance with law and other regulations such as the business law, the added value tax law, the environment protect law, and accounting law…

The role of internal audit :

Internal audit organization plays role as manageable tool of top of management in the enterprise It serves for governance activity of firm itself, particularly the

elements of assurance, risk, and control

Question 6: List some services which independent auditor provide

The main activity of the independent audit organization is to provide audit services, in addition to also perform some other services for the client unit Common services of independent audit organizations are:

- Verification service: is the performance of the audit and giving confirmation about the reliability of the financial information of the audited entity

- Accounting services: including keeping books, recording accounting books, synthesizing financial information, preparing financial statements, organizing the accounting work and accounting apparatus for customers, in case In this case,

the audit organization does not perform the testing but rather provides the service

on the basis of the documents provided by the customer

- Consulting service: is the service that auditing organizations usually undertake related to the expertise, capabilities of auditing organizations and according to the law of each country Consulting services include:

- Other services: property valuation services, training services, updating knowledge

of finance, accounting, auditing

Question 7: List the specific objectives of internal auditing

The objectives of an internal audit are to:

- The economic operations presented on the books must have sufficient grounds for recording (with reasonable grounds)

- The economic operations must be properly approved (approval)

- The arising economic transactions, assets in actual existence must be recorded in full (completeness)

- The economic transactions and existing assets must be accurately calculated and recorded according to an appropriate value (evaluation and calculation)

- The economic operations are properly classified (classification)

- Economic operations must be promptly reflected (promptly)

- Economic transactions must be properly recorded in detailed books and accurately synthesized and presented in the financial statements in accordance with regulations (cumulative and presentation)

Question 8:The level of assurance provided by an external audit is absolute Is this statement true or false? Explain

False

“is absolute” => “is reasonable” Because of limitations inherent in the auditing process restrict the ability to guarantee assurance

Question 9: The independent audit firms only conduct to audit financial

statements True or false Explain

Question 11: List the Code of ethics for independent auditing

- Integrity Members should be straightforward and honest in all professional

and business relationships

-Objectivity Members should not allow bias, conflicts of interest or undue influence of others to override professional or business judgements

-Professional competence and due care

14 Members have a continuing duty to maintain professional knowledge and skill

at the level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and techniques

Members should act diligently and in accordance with applicable technical and professional standards

-Confidentiality Members shall respect the confidentiality of information acquired

as a result of professional and business relationships and, should not disclose any such information to third parties without proper and specific authority, or unless there is a legal or professional right or duty to disclose

Confidential information acquired as a result of professional and business relationships should not be used for the personal advantage of members or third parties

- Self-interest The auditors‟ own personal interest, e.g the auditors may fear

the loss of fees

- Self-review When carrying out the audit, the auditors, review work that their own firm has undertaken previously, e.g preparing accounts or making a valuation

-Advocacy If the auditors get involved in disputes concerning the client, they may end up acting for or against the client, which undermines the appearance of objectivity

-Familiarity If the auditors are involved with the client for a long time, they may become unduly sympathetic towards directors and management and thus too inclined to trust their unsupported word

-Intimidation The auditors may be intimidated by a dominant or aggressive

atmosphere at the client

For example : the audit firm owns shares in the client, or is a trustee of a trust that holds shares in the client

Question 13: Auditors must compliance the accounting standards when they perform the audit Right or Wrong? Explain

Right

Because : Auditing standards set standards for the auditor's work in the audit

process to achieve the auditor's overall goals Auditing Standards specify and guide the auditor's general responsibilities, as well as the issues the auditor should

consider when performing his responsibilities in the particular circumstances

Question 14: What is audit report? Explain why auditors’reports are

important to users of FSs

The auditor's report is a formal opinion, or disclaimer thereof, issued by either an internal auditor or an independent external auditor as a result of an internal or external audit, as an assurance service in order for the user to make decisions based

on the results of the audit

The auditor's report is a written letter from the auditor containing the opinion of whether a company's financial statements comply with generally accepted accounting principles (GAAP) The independent and external audit report is typically published with the company's annual report

auditors‟reports are important to users of FSs because : Auditors' reports are important to users of financial statements because they inform users of the auditor's opinion as to whether or not the financial statements are fairly stated or whether no conclusion can be made with regard to the fairness of their presentation

-The goal of an auditor's report is to document reasonable assurance that a company's financial statements are free from error Along with balance sheets, profit & loss statements, and directors reports, auditor's reports make up part of a company's statutory accounts

Question 15: List the content of the financial statement audit report of

independent auditor

Content of the financial statement audit report of independent auditor:

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements An audit also includes assessing the

accounting principles used and significant estimates made by management, as well

as evaluating the overall financial statement presentation

Question 16: How many types of audit report? And How many types of audit opinion?

 There are four common types of auditor's reports, each one presenting a different situation encountered during the auditor's work The four reports are as follows

- Qualified Opinion

In situations when a company‟s financial records have not been maintained in accordance with GAAP but no misrepresentations are identified, an auditor will issue a qualified opinion The writing of a qualified opinion is extremely similar to that of an unqualified opinion A qualified opinion, however, will include an additional paragraph that highlights the reason why the audit report is not unqualified

- Adverse Opinion

The worst type of financial report that can be issued to a business is an adverse opinion This indicates that the firm‟s financial records do not

conform to GAAP In addition, the financial records provided by the business have been grossly misrepresented Although this may occur

by error, it is often an indication of fraud When this type of report is issued, a company must correct its financial statement and have it re-audited, as investors, lenders and other requesting parties will generally not accept it

- Disclaimer of Opinion

On some occasions, an auditor is unable to complete an accurate audit report This may occur for a variety of reasons, such as an absence of appropriate financial records When this happens, the auditor issues a disclaimer of opinion, stating that an opinion of the firm‟s financial status could not be determined

 In preparing these FSs, the company is required to:

1) Select suitable accounting policies and then apply them consistently; 2) Make judgments and estimates that are reasonable and prudent; 3) State whether applicable accounting principles have been followed, subject to any material departures disclosed and explained in the FSs; 4) Design and implement an effective internal control system for the purpose of properly preparing and presenting the FSs to minimize errors

5) Prepare the FSs on the going concern basis

2 Define the management assertions Why do the auditors need to test FSs assertions?

 Definition of Assertions:

Assertions are the implicit or explicit claims and representations made by the management responsible for the preparation of financial statements regarding the appropriateness of the various elements of financial statements and disclosures

 Why do the auditors need to test FSs assertions?

The objective of audit testing is to assist the auditor in coming to a conclusion as to whether the financial statements are free from material misstatement

However, the auditor does not simply design tests with the broad objective to identify material misstatement This is a difficul conclusion to reach and can only be based upon a series of detailed tests, each designed with a specific testing objective relating to certain areas of the financial statement

3 What is the relationship between management assertions and audit objectives Give an example

Management assertions is formed on the target synthesis for all criteria

in the main report The different parts that make up the financial statements, specific audit objectives are different However, the general audit objective is the same for all departments, the indicators constituting the financial statements and that general audit objective are presented in the database form of the indicators and constituent parts of the financial statements

Completeness Completeness Completeness

allocation

Accuracy and valuation

understandability Cutoff

Rights and obligation Examples: Salary costs

Occurrence: Salaries & wages expense has been incurred during the

period in respect of the personnel employed by the entity Salaries and wages expense does not include the payroll cost of any unauthorized personnel

Completeness: Salaries and wages costs in respect of all personnel have

been fully accounted for

Accuracy: Salaries and wages cost have been calculated accurately

Any adjustments such as tax deduction at source have been correctly reconciled and account for

Classification: Salaries and wages cost has been fairly allocated:

+ Operating expenses incurred in production activities;

+ General and administrative expenses;

+ Cost of personnel relating to and self – constructed assets other than

inventory

Cutoff: Salaries and wages cost recognized during the period relates to

the current accounting period Any accrued and prepaid expenses have been accounted for correctly on the finacial statements

4 List the types of assertions relating to transactions

 Occurrence: recorded transactions exist

 Completeness: Existing transactions are recorded

 Accuracy: Recorded transactions are stated at the correct amounts

 Classification: Transactions have been classified and presented fairly in the financial statements

 Cutoff: correct accounting periods

5 List the types of assertions relating to account balances

 Existence: Amount included exist

 Completeness: Existing amounts are included

 Valuation: have been valued appropriately

 Rights and obligation: Entity has the right to ownership, the liabilities in the financial statements represent the obligations

6 Present the common accepted audit procedures

The auditor can obtain audit evidence through the following procedures :

7 What are the overall audit objectives in conducting an audit of FSs?

- To obtain reasonable assurance about whether are financial statements as

a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financail reporting framework

- To report on the financial statements and communicate as required by professional standards and applicable legal and regulatory requirements,

in accordance with the auditor‟s findings

8 What are the audit objectives in forming an opinion and in expressing that opinion about the audited FSs?

In forming an opinion on the financial statements and in expressing that opinion in the auditor‟s report, the objectives of the auditor are to:

- Form an opinion on the financial statements based on an evaluation of the conclusions drawn from the audit evidence obtained

- Expess clearly that opinion through a written report that also describes the basic for that opinion

- Expess clearly an appropriately modified opinion on the financial statements that is necessary when the auditor

- Concludes, based on the audit evidence obtained, that the financial statements as a whole are not free from material misstatement

- Is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement

9 What is the definition of fraud and error? What is the difference between fraud and error?

- An error represents an unintentional misstatement of the financial

statement It may be material or immaterial

- Errors are unintentional errors or missteps that affect reporting

- Handling documents subjectively:

Distorting, forging, amending vouchers

and documents related to financial

statements;

- Concealing or intentionally omitting

information, documents or economic

operations that falsify financial

statements;

- Record of untrue operations;

- Deliberately incorrectly applying

standards, principles, methods and

regimes on accounting and financial

policies;

- Intentionally miscalculating to falsify

- Errors in arithmetic calculation or wrong recording;

- omission or misinterpretation leads to falsifying economic items or operations due to limited knowledge and education;

- Incorrect application of accounting standards, principles, methods, and financial policies due to limited capacity

10 Explain clearly the management and auditor‟s responsibilities for fraud and error in the FSs

 The external auditor is responsible for obtaining reasonable assurance that the financial statements, taken as a whole, are free from material misstatement, whether caused by fraud or error Therefore, the external auditor has some responsibility for considering the risk of material misstatement due to fraud

 The Auditor‟s responsibilities here:

1 Obtain reasonable assurance that the financial statements are free from material misstatements

2 Maintain professional skepticism throughout the audit

3 Should know that Risk of non-detection of management fraud is greater than of employee fraud

4 Must be aware Risk of non-detection of fraudulent material misstatement

is higher than the misstatement due to error

 Management has the Primary responsibility for the prevention and detection

of fraud and not the auditor Management should take all necessary steps for fraud prevention and deterrence through implementing policies and controls

11 List the factors affect fraud and error

- Unusual transactions and events

- Difficult points relate to obtaining sufficient appropriate audit evidence

- Issues related to integrity and capacity of the board of directors

- Abnormal pressures inside or outside the unit exist in the financial statements

- Factors from the informatics environment are related to the situations and events mentioned above

12 Define the meaning of materiality Identify steps to apply materiality in an audit

 Materiality relates to both the content of the financial statements and the level and type of testing to be done The decision is based on judgements financial statements or for personal

benefit

about the size, nature and particular circumstances of misstatements (or omissions) that could influence users of the financial reports

 Identify steps to apply materiality in an audit

1 Determine a base and calculate a number

Once a preliminary figure is calculated- then consider qualitative items:

o Misstatements due to fraud/ illegal acts

o Amounts that may violate contractual covenants

o Amounts that may affect earnings trends

o Misstatements that may increase management compensation

o Amounts that may result in an entity missing its forecast

o Industry conditions

o Past number of misstatements

2 During the audit, auditors track the misstatements on the SUE- Summary of Unadjusted Errors

3 Estimate the likely misstatement and compare the total to the preliminary materiality

o If the estimate misstatement is less than materiality- then the auditor can generally conclude the financial statements are fairly presented

o If the estimate is greater than materiality then the adjustments should be recorded by the client- if the client refuses then the auditor cannot issue a clean audit report

o Unadjusted amounts from prior years should be carried forward in assessing the misstatement

o Preliminary materiality may be revised if the auditor feels it is necessary due to information obtained during the audit

13 What is audit risk and identify its elements in an audit of FSs

Audit risk is defined as „the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated Audit risk is a function of the risks of material misstatement and detection risk‟ Hence, audit risk is made up of two components – risks of material misstatement and detection risk

 Risk of material misstatement is defined as „the risk that the financial statements are materially misstated prior to audit This consists of two components inherent risk control risk.‟

 Inherent risk is „the susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.‟

 Control risk is „the risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity‟s internal control.‟

 Detection risk is defined as „the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect

a misstatement that exists and that could be material, either individually

or when aggregated with other misstatements

14 What is IR, CR & DR? What is the difference among IR, CR and DR?

- Inherent risk (IR) is the susceptibility of an account balance or class of transactions to material misstatement, assuming there are no related controls

- Control risk (CR) is the risk that the system of internal controls will fail

to prevent or detect material

- Detection risk (DR) is the risk that the audit procedures will fail to detect material misstatements that were not caught by the internal controls

Define -The suspicion of a

certain account balance

in a certain item or business where error can occur assuming that there is no relevant internal control step

-probability of loss due to breakdown

of the internal control measures taken to minimize the risk

is the risk that the audit procedures will fail to detect material

misstatements that were not caught by the