Audit Responsibilities and Objectives

Question 1

What is the purpose of an audit?

Answer 1

The purpose of an audit is to provide the financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial accounting framework, which enhances the degree of confidence that intended users can place in the financial statements.

Question 2

What happens if the auditor believes the financial statements are not fairly presented or if there’s insufficient evidence?

Answer 2

The auditor must modify their opinion in the audit report and inform users accordingly.

Question 3

What is the auditor’s best defense if facts emerge after the issuance of an audit report suggesting that the financial statements were not fairly stated?

Answer 3

The auditor’s best defense is that they performed the audit procedures in accordance with auditing standards.

Question 4

Who holds primary responsibility for preparing and presenting financial statements according to the applicable financial reporting framework?

Answer 4

The management of the company

Question 5

What are the additional responsibilities of the management of a company regarding financial reporting? List them (MPG).

Answer 5

Additional responsibilities of the management include:
a. Establishing and maintaining internal controls to ensure financial statements are free from material misstatements, whether due to fraud or error.
b. Adopting sound accounting policies based on the applicable financial reporting framework and making reasonable accounting estimates.
c. Assessing the entity’s ability to continue as a going concern.

Question 6

What are the responsibilities of the management of a company regarding the audit of financial statements? List them (IA).

Answer 6

In connection with the audit of the company’s financial statements, the management is responsible for:
a. Providing the auditor all information from documents and records relevant to the preparation and presentation of FS, including additional information the auditor may request.
b. Providing the auditor with unrestricted access to personnel within the organization from whom the auditor deems it necessary to obtain audit evidence.

Question 7

Who is responsible for overseeing the company’s financial reporting process?

Answer 7

Those charged with governance, such as the company’s board of directors (BOD)

Question 8

What obligation does management have under the Securities and Regulation Code (SRC) regarding audited annual financial statements submitted to the Philippine Securities and Exchange Commission (Philippine SEC)?

Answer 8

Management is required to attach the Statement of Management’s Responsibility when submitting their audited annual financial statements.

Question 9

Where must management submit their audited annual financial statements in accordance with the Securities and Regulation Code (SRC) where they are also required to attach the Statement of Management’s Responsibility?

Answer 9

Philippine Securities and Exchange Commission (Philippine SEC)

Question 10

Who is required to sign the Statement of Management’s Responsibility, as per regulations?

Answer 10

The Statement of Management’s Responsibility must be signed by at least two (2) senior officers of the company: one responsible for the overall direction of the company (e.g., CEO) and another responsible for the financial aspects of the company (e.g., CFO).

Question 11

Whose responsibility is the accumulation and evaluation of evidence to support the items in the financial statements?

Answer 11

The auditor

Question 12

What are the overall objectives of the auditor in conducting an audit of financial statements (AR)?

Answer 12

a) To obtain reasonable assurance about whether the 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 presented fairly, in all material respects, in accordance with an applicable financial reporting framework; and
b) To report on the financial statements, and communicate as required by auditing standards, in accordance with the auditor’s findings.

Question 13

What is the scope of the auditor’s responsibility concerning items in the financial statements?

Answer 13

Only to material items

Question 14

How is information classified as material in the context of financial statements?

Answer 14

Information is considered material if its omission or misstatement can influence the decisions of the users within the context of the financial statements.

Question 15

What does “reasonable assurance” mean in the context of auditing financial statements?

Answer 15

Reasonable assurance is a high, but not absolute, level of assurance that the financial statements are free of material misstatements. Thus, an audit conducted in accordance with auditing standards may still fail to detect a material misstatement.

Question 16

What is emphasized about the auditor’s role in terms of guaranteeing the accuracy of financial statements?

Answer 16

The auditor is not an insurer or guarantor of the accuracy of financial statements, highlighting that reasonable assurance does not imply absolute certainty.

Question 17

Why is the level of assurance provided by auditors not absolute (SJED)?

Answer 17

The level of assurance is not absolute due to the following reasons:

1. The use of selective testing, which involves testing a sample of the population, carries the risk of not detecting material misstatements.
2. Auditor’s judgment plays a significant role in decisions regarding the areas, type, extent, and timing of audit procedures.
3. Financial statements often involve significant judgment and complex estimates, leading to uncertainty affected by future events, which necessitates reliance on persuasive rather than conclusive evidence.
4. Detecting fraudulently prepared financial statements is challenging, especially in cases of collusion among management or with outside parties.

Question 18

What contributes to the uncertainty surrounding financial statements in auditing processes?

Answer 18

The uncertainty surrounding financial statements in auditing processes is exacerbated by the complexity of judgment and the reliance on estimates, particularly in anticipation of future events.

Question 19

What are the two main causes of misstatements in financial statements, and how are they differentiated?

Answer 19

Misstatements in financial statements can be caused by errors and/or fraud. An error refers to an unintentional misstatement, while fraud is intentional.

Question 20

Which of the two do auditors have more responsibility for finding: material errors or material frauds?

Answer 20

Auditors have the same level of responsibility for materials frauds and material errors.

Question 21

How can fraud be further categorized (not as to perpetrator)?

Answer 21

Fraud can be further categorized as:

1. Misappropriation of assets
2. Fraudulent financial reporting

Question 22

How can fraud be categorized based on the perpetrator?

Answer 22

Fraud can be categorized by perpetrator into:

1. Employee fraud
2. Management fraud

Question 23

Can auditing standards differentiate between the auditor’s responsibilities regarding errors and fraud?

Answer 23

Auditing standards do not differentiate between the auditor’s responsibilities for detecting errors and fraud.

Question 24

What makes fraud, particularly management fraud, challenging to detect?

Answer 24

Fraud is often more difficult to detect because perpetrators, whether management or employees, attempt to conceal it. Management fraud is particularly challenging to detect as management has the authority to override controls designed to prevent and detect such frauds.

Question 25

What level of understanding of legal and regulatory requirements is the auditor required to obtain?

Answer 25

The auditor is only required to obtain a general understanding of the legal and regulatory requirements affecting the client’s financial reporting.

Question 26

What factors affect the auditor’s ability to detect material misstatements arising from client non-compliance with laws and regulations (OCLR)?

Answer 26

1. Many laws and regulations primarily relate to operating aspects of the business and may not affect the financial statements, thus escaping the client’s information systems related to financial reporting.
2. Non-compliance may involve actions designed to conceal them.
3. Determining whether an act constitutes non-compliance is a legal matter, often decided by a court of law.
4. The further removed the impact from non-compliance is from the financial statements, the less likely the auditor is to become aware of or recognize non-compliance when auditing the financial statements.

Question 27

What actions may be involved in concealing non-compliance (CFDMI)?

Answer 27

Non-compliance may involve actions designed to conceal them, such as:

Collusion
Forgery
Deliberate failure to record transactions
Management override of controls
Intentional misrepresentation made to the auditor

Question 28

What determines the auditor’s responsibilities regarding non-compliance with laws and regulations?

Answer 28

The auditor’s responsibilities regarding non-compliance with laws and regulations depend on whether the laws or regulations are expected to have a direct effect on the amounts and disclosures in the financial statements.

Question 29

Which laws and regulations are generally recognized to have a direct effect on the amounts and disclosures in financial statements?

Answer 29

Provisions of certain laws and regulations, such as tax and pension laws and regulations, are generally recognized to have a direct effect on the amounts and disclosures in financial statements.

Question 30

What should auditors obtain regarding material amounts and disclosures affected by laws and regulations?

Answer 30

The auditor should obtain sufficient and appropriate evidence regarding material amounts and disclosures that are affected by laws and regulations.

Question 31

What are the potential consequences of noncompliance with laws and regulations that may not directly impact the financial statements?

Answer 31

Noncompliance with certain laws and regulations may not immediately impact the entity’s financial statements. However, it could eventually lead to significant financial consequences in the form of penalties and fines.

Question 32

What procedures should the auditor perform to identify instances of non-compliance with laws and regulations that may materially affect the financial statements (IC IC)?

Answer 32

The auditor should perform the following procedures:

1. Inquire of management and those charged with governance about whether the entity is in compliance with such laws and regulations.
2. Inspect correspondence, if any, with the relevant government agency or regulatory authorities.

Question 33

During the audit, may other audit procedures bring instances of suspected non-compliance to the auditor’s attention.

Answer 33

Yes

Question 34

What are the audit procedures when non-compliance is identified or suspected (NEMLR)?

Answer 34

1. Understand nature and circumstances of the act.
2. Evaluate its effects on financial statements.
3. Discuss with management at a level above those involve with the act or those charged with governance.
4. Seek legal advice if management or those charged with governance cannot provide sufficient information supporting compliance, if the effects are material to the financial statements.
5. Evaluate impact on auditor’s risk assessment and reliability of management representations.

Question 35

How should auditors report identified or suspected non-compliance (CNAD)?

Answer 35

1. Communicate with those charged with governance unless inconsequential.
2. Assess the need to report to external parties.
3. Express qualified or adverse opinion on financial statements if material non-compliance is not adequately reflected in financial statements
4. Express qualified or disclaimer opinion on financial statements if prevented by management or those charged with governance from obtaining sufficient evidence to determine materiality of non-compliance.

Question 36

What action should the auditor take if non-compliance has a material effect but has not been adequately reflected in the financial statements?

Answer 36

The auditor should express a qualified or adverse opinion on the financial statements.

Question 37

What action should the auditor take if prevented from obtaining sufficient appropriate evidence to evaluate whether non-compliance may be material to the financial statements?

Answer 37

The auditor should express a qualified or disclaim an opinion on the financial statements based on the scope limitation.

Question 38

What attitude must the auditor maintain throughout the audit process?

Answer 38

The auditor must plan and perform the audit with an attitude of professional skepticism in all aspects of the engagement, recognizing the possibility that a material misstatement could exist regardless of the auditor’s prior experience with the integrity and honesty of client management and those charged with governance.

Question 39

What are the two important aspects of professional skepticism?

Answer 39

Professional skepticism consists of:

1. A questioning mind
2. A critical assessment of the audit evidence

Question 40

What aspect of professional skepticism emphasizes the need to question information and evidence?

Answer 40

The questioning mindset aspect of professional skepticism emphasizes the need for auditors to not take information at face value and to critically question the evidence presented

Question 41

What aspect of professional skepticism involves auditors’ training to avoid overgeneralizations?

Answer 41

The critical assessment aspect of professional skepticism involves auditors being trained to critically assess evidence, regardless of whether it confirms or contradicts their initial expectation

Question 42

What is the auditor’s approach towards the client’s management in maintaining professional skepticism?

Answer 42

In maintaining an attitude of professional skepticism, the auditor does not regard the client’s management as either dishonest or of unquestioned honesty. Instead, professional responsibilities mandate obtaining sufficient and appropriate evidence to substantiate the auditor’s opinion.

Question 43

What is professional skepticism in relation to professional judgment?

Answer 43

Professional skepticism is one component of professional judgment.

Question 44

What does professional judgment entail?

Answer 44

Professional judgment refers to the application of the auditor’s relevant knowledge and experience in making informed decisions during an audit engagement.

Question 45

What does professional judgment involve?

Answer 45

Professional judgment involves making choices about the nature, timing, and extent of auditing procedures, as well as interpreting the results and drawing conclusions based on the audit evidence obtained.

Question 46

In what situations is professional judgment particularly crucial?

Answer 46

Professional judgment is particularly crucial in complex or ambiguous situations where standard procedures may not be sufficient or applicable.

Question 47

In what areas is professional judgment extensively used in an audit engagement (SRTPEC)?

Answer 47

Determining audit strategy
Assessing risks
Setting materiality thresholds
Designing audit procedures
Evaluating evidence
Drawing conclusions for the audit report

Question 48

What are the benefits of dividing financial statements into smaller segments for auditing purposes?

Answer 48

Dividing financial statements into smaller segments offers the benefit of focusing on specific areas, making the audit process more manageable, efficient, and effective.

Question 49

How does dividing financial statements into smaller segments enhance audit efficiency and effectiveness?

Answer 49

Dividing financial statements into smaller segments facilitates the assignment of tasks to different members of the audit team, enhancing efficiency and effectiveness.

Question 50

What are common approaches to segmenting financial statements for auditing purposes (2)?

Answer 50

One common method is segmentation by account, while another is segmentation by transaction cycle.

Question 51

What inefficiency can auditing by account lead to in certain scenarios?

Answer 51

Auditing by account might be inefficient in certain scenarios as it can lead to related accounts being audited independently, possibly missing the interconnections between them.

Question 52

What is the transaction cycle approach in auditing, and what is it closely tied to?

Answer 52

It involves auditing transactions and account balances that are part of the same transaction cycle. It is closely tied to the way transactions are recorded in journals and subsequently summarized in the general ledger and financial statements, aligning the audit process with the accounting process.

Question 53

What are the specific transaction cycles included in the transaction cycle approach to auditing (SAPIC)?

Answer 53

The specific transaction cycles included in this approach are:

1. Sales and Collection Cycle or the Revenue Cycle
2. Acquisition and Payment Cycle or the Purchasing Cycle
3. Payroll and Personnel Cycle or the Payroll Cycle
4. Inventory and Warehousing Cycle or the Conversion Cycle
5. Capital Acquisition and Repayment Cycle

Question 54

What does the Sales and Collection Cycle, or the Revenue Cycle, involve?

Answer 54

The Sales and Collection Cycle, or the Revenue Cycle, involves the process from making sales to collecting cash, encompassing receivables and revenue recognition.

Question 55

What does the Acquisition and Payment Cycle, or the Purchasing Cycle, cover?

Answer 55

The Acquisition and Payment Cycle, or the Purchasing Cycle, covers the procurement of goods and services and their payment. This cycle includes payables and expense recognition.

Question 56

What does the Payroll and Personnel Cycle, or the Payroll Cycle, focus on?

Answer 56

The Payroll and Personnel Cycle, or the Payroll Cycle, is focused on the expenses and liabilities related to personnel, including wages, salaries, and related benefits.

Question 57

What does the Inventory and Warehousing Cycle, or the Conversion Cycle, involve?

Answer 57

The Inventory and Warehousing Cycle, or the Conversion Cycle, involves the management of inventory, from acquisition to sale, including inventory valuation and cost of goods sold.

Question 58

What does the Capital Acquisition and Repayment Cycle cover?

Answer 58

The Capital Acquisition and Repayment Cycle is concerned with long-term assets and financing. It covers capital expenditure, debt, and equity transactions.

Question 59

How does the transaction cycle approach benefit auditors?

Answer 59

Using the transaction cycle approach helps auditors understand the flow of transactions through the business, enhancing their ability to identify risks and control weaknesses within each cycle.

Question 60

What is the nature of transaction cycles in a company regarding their beginning and end?

Answer 60

Transaction cycles in a company do not have a definite beginning and end, except for the start of the company and its cessation.

Question 61

How would you describe the flow of transactions within a company’s transaction cycles?

Answer 61

The flow of transactions within a company’s transaction cycles is continuous and cyclical.

Question 62

How do auditors initially treat transaction cycles in their audit process, and how does their approach evolve later on?

Answer 62

Initially, auditors treat each cycle separately to focus on specific risks and controls. Later on, they consider the interrelationships among these cycles, combining the results to form a comprehensive audit conclusion.

Question 63

How do auditors conduct financial statement audits using the cycle approach?

Answer 63

Auditors conduct financial statement audits using the cycle approach by performing audit tests of the transactions making up ending balances and also by performing audit tests of the account balances and related disclosures.

Question 64

Is it practical for the auditor to obtain complete assurance about the correctness of transactions during the period and the ending balance of the account?

Answer 64

No.

Question 65

What is considered the most efficient and effective way to conduct audits?

Answer 65

The most efficient and effective way to conduct audits is to obtain a combination of assurance for each significant class of transactions and for the ending balance in the related accounts.

Question 66

What are the audit objectives called that must be met before the auditor can conclude that transactions are properly recorded and appropriately disclosed?

Answer 66

They are called transaction-related audit objectives.

Question 67

What are the audit objectives called that must be met for each account balance and related disclosures?

Answer 67

They are called balance-related audit objectives.

Question 68

What are management assertions?

Answer 68

Management assertions are representations, express or implied, made by management about classes of transactions and the related accounts and disclosures in the financial statements. They are directly related to the financial reporting framework used by the company and are part of the criteria that management uses to record and disclose accounting information in financial statements.

Question 69

According to auditing standards (PSA 315, Revised in 2019), what are the two categories of management assertions?

Answer 69

Assertions about classes of transactions and events and related disclosures for the period under audit.
Assertions about account balances and related disclosures at period end.

Question 70

What are the assertions about classes of transactions and events and related disclosures according to auditing standards (OCCCAP)?

Answer 70

Answer:

Occurrence
Completeness
Accuracy
Classification
Cutoff
Presentation

Question 71

What do the assertions “Cutoff” and “Presentation” pertain to in auditing standards?

Answer 71

Cutoff pertains to the correct accounting period, while Presentation pertains to the appropriate aggregation and disaggregation of transactions and events.

Question 72

What are the assertions about account balances and related disclosures according to auditing standards (ECCARP)?

Answer 72

Existence
Completeness
Accuracy, valuation, and allocation
Classification
Rights and obligations
Presentation

Question 73

What does the auditor consider regarding each assertion for each significant class of transactions and account balance?

Answer 73

The auditor considers the relevance of each assertion.

Question 74

What are the steps involved in the audit process regarding the identification of relevant assertions and the development of audit objectives?

Answer 74

1. Identification of relevant assertions
2. Development of audit objectives for each category of assertions
3. Decision on the nature, type, and quantity of evidence from audit objectives set to satisfy audit objectives

Question 75

What remains consistent from audit to audit in the audit process regarding the identification of relevant assertions and the development of audit objectives?

What aspect of the audit process may vary depending on the circumstances of the engagement?

Answer 75

The objectives remain the same from audit to audit.

The evidence could vary depending on the circumstances of the engagement.

Question 76

What are the general transaction-related audit objectives (OCCAPPT)?

Answer 76

Occurrence
Completeness
Accuracy
Posting and summarization
Classification
Timing
Presentation

Question 77

What opposite concerns do the occurrence and completeness objectives emphasize in auditing?

Answer 77

The occurrence objective deals with potential overstatement, while the completeness objective deals with unrecorded transactions or potential understatement.

Question 78

What does the auditor do after determining the general transaction-related audit objectives?

Answer 78

The auditor develops specific transaction-related audit objectives for each significant class of transactions and related disclosures.

Question 79

How many specific transaction-related audit objectives are typically included for each general transaction-related audit objective?

Answer 79

At least one

Question 80

What are the general balance-related audit objectives (ECCCDARRP)?

Answer 80

Existence
Completeness
Accuracy
Cutoff
Detail tie-in
Realizable value
Classification
Rights and Obligations
Presentation

Question 81

What opposite concerns do the existence and completeness objectives emphasize in auditing?

Answer 81

The existence objective deals with potential overstatement, while the completeness objective deals with unrecorded transactions or potential understatement.

Question 82

What follows after determining the general balance-related audit objectives?

Answer 82

Specific balance-related audit objectives for each account balance on the financial statements can be developed.