A1-1: Audited Financial Statements: The Basics

Question 1

What is the purpose of an audit?

Answer 1

The purpose of an audit is to provide financial statement users with an opinion on whether the financial statements are presented fairly, in all material aspects, in accordance with the applicable financial reporting framework. (A1-3)

Question 2

What are management’s responsibilities in regards to the financial statements and internal controls?

Answer 2

Management is responsible for:

1. Preparation and fair presentation of the financial statements.
2. Design, implementation, and maintenance of internal controls.
3. Providing the auditor with access to information & persons within the entity needed to complete the audit.

(A1-3)

Question 3

What is an applicable financial reporting framework?

Answer 3

The applicable financial reporting framework is the financial reporting framework that is acceptable in view of the nature of the entity and the objective of the financial statements, or that is required by law or regulation.

Acceptable financial reporting frameworks include general purpose frameworks designed to meet the needs of a wide range of users, and special purpose frameworks.

(A1-3)

Question 4

What is required in regards to preparation and fair presentation of financial statements?

Answer 4

1. Identification of the applicable financial reporting framework.
2. Preparation and fair presentation of the financial statements in accordance with the framework.
3. Inclusion of an adequate description of the framework in the financial statements.

(A1-4)

Question 5

What is “reasonable assurance?”

Answer 5

Reasonable assurance is a high, but not absolute, level of assurance.

Question 6

What must an auditor do in order to obtain reasonable assurance?

Answer 6

1. Plan the work and properly supervise any assistants.
2. Determine and apply appropriate materiality levels.
3. Identify and assess risks of material misstatement, whether due to fraud or error.
4. Obtain sufficient appropriate audit evidence.

(A1-4)

Question 7

What are the inherent limitations of an audit?

Answer 7

1. The nature of financial reporting.
2. The nature of audit procedures.
3. Timeliness of financial reporting and the balance between cost and benefit.

(A1-4)

Question 8

What must an auditor do in order to express an opinion?

Answer 8

In order to express an opinion, an auditor must obtain reasonable assurance about whether the financial statements are free from material misstatement, whether due to error or fraud.

Question 9

What is the auditor’s responsibilities in regards to the audit?

Answer 9

The auditor is responsible for expressing an opinion on the financial statements based on the audit.

The auditor is also responsible for having appropriate competence and capabilities to perform the audit, complying with relevant ethical requirements, maintaining professional skepticism, and exercising professional judgment throughout the planning and performance of the audit.

Question 10

What is the inherent limitation relevant to the nature of financial reporting?

Answer 10

Some financial statement items are subject to an inherent level of variability because they involve judgment by management or because they involve subjective decisions or assessments or a degree of uncertainty (eg. accounting estimates).

Question 11

What are the inherent limitations relevant to the nature of audit procedures?

Answer 11

There are practical and legal limits on an auditor’s abiity to obtain audit evidence, including:

1. The possibility that management or others may not provide, intentionally or unintentionally, the complete information that is needed for the preparation and fair presentation of the financial statements or that is requested by the auditor.
2. Fraud may be concealed in such a way that it is difficult to detect with audit procedures.
3. An audit is neither an investigation into a wrongdoing nor does the auditor have specific legal powers.

Question 12

What are the inherent limitations relative to timeliness of financial reporting and the balance between cost and benefit?

Answer 12

There is an expectation by users of the financial statements that the auditor will form an opinion on the financial statements within a reasonable period of time and will achieve a balance between benefit and cost, recognizing that it is impracticable to address all information that may exist. Therefore, it is necessary for the auditor to:

1. Plan the audit so that it is performed effectively.
2. Direct efforts to areas most expected to contain risks of material misstatement.
3. Use testing and other means of examining populations for misstatement.