Ch 2 Basic Concepts of Auditing [ISA 200]

Question 1

What is F/S

Chapter No. 2

Answer 1

Financial statements mean structured representation of historical (i.e. past) financial information,

Question 2

WHAT IS MEANT BY TRUE AND FAIR VIEW?

Chapter No. 2

Answer 2

Term “true and fair view” or “fair presentation” have no legal definition. Generally:
* true means free from errors, and
* fair means free from undue bias in preparation or presentation of financial statements.
The phrase “True and fair view” indicates that **judgment **is applied in preparation of financial statements by management, and in expressing opinion by the auditor

Question 3

What is fair representation framework?

Chapter No. 2

Answer 3

Fair presentation framework is a financial reporting framework that requires compliance with requirements of the framework and contains acknowledgment that, to achieve fair presentation
it may be necessary for management:
« To provide disclosures in addition to specific requirements of framework or
» To depart from a requirement of framework
An example is International Financial Reporting Standards.

Question 4

How auditor expresses his opinion in fair representation framework?

Chapter No. 2

Answer 4

In Fair presentation framework, auditor expresses opinion whether:
» “financial statements give true and fair view in accordance with the framework”, or
» “financial statements are presented fairly, in all material respects, in accordance with the framework”, (Both phrases are equivalent)

Question 5

What is Compliance Framework?

Chapter No. 2

Answer 5

Compliance framework is a financial reporting framework that requires compliance with requirements of the framework, and does not contain acknowledgements which are contained in fair presentation framework ( regarding additional disclosures or departure from requirements of framework to achieve fair presentation)

Question 6

How auditor expresses his opinion in Compliance Framework?

Chapter No. 2

Answer 6

In Compliance framework, auditor expresses opinion whether “financial statements are prepared, in all material respects, in accordance with the framework”.
An example is Tax-basis Framework.

Question 7

What is AFRF

Chapter No. 2

Answer 7

AFRF is the financial reporting framework adopted by management and Those Charged With Governance (TCWG), in preparation of financial statements considering legal requirements, nature of entity, nature of financial statements, and purpose of financial statements.
AFRF includes financial reporting standards (e.g. IFRS or US GAAP), and may be supplementedby law or regulation.

Question 8

IF AFRF other than IFRS what shall be mentioned in auditor’s report?

Chapter No. 2

Answer 8

If AFRF is other than IFRS, country of framework shall also be mentioned in financial statements
and auditor’s report.

Question 9

What will auditor do if AFRF not applicable?

Answer 9

1. Auditor shall not accept proposed audit engagement, If AFRF is NOT acceptable.
   2, Management means persons responsible for operational and managerial duties (e.g. CFO, CEO).
2. TCWG means persons responsible for Overseeing the strategic direction and Accountability (e.g, Directors).

Question 10

What are resposibilities of management and TCWG?

Chapter No. 2

Answer 10

Audit is conducted on the premise that management ( and TCWG where applicable) is responsible :
1.For preparation and presentation of financial statements in accordance with AFRF (This includes identifying AFRF, preparing financial statements in accordance With AFRF,
applying appropriate accounting policies and reasonable estimates. )
2. For design, implementation and operating effectiveness of such internal controls which are necessary for preparation of reliable financial statements;
3. To provide auditor with:
a. all relevant information,
b. additional information requested by auditor, and
c. unrestricted access to persons within the entity to obtain evidence.

Question 11

What is OVERALL OBJECTIVES (OR RESPONSIBILITIES) The OF AUDITOR/AUDIT?

Chapter No. 2

Answer 11

• To obtain reasonable assurance whether financial statements are free from material misstatements (whether due to fraud or error)
• To report on FS which includes auditor’s opinion
• To communicate auditor’s findings (to directors, regulators) as required by ISAs

Question 12

What is expectation gap?
Chapter No. 2

Answer 12

Expectation gap means public perception of the role and responsibilities of the external auditor is different (and is usually higher) from his statutory role and responsibilities.

Question 13

What are some common expectation gap about Audit?
Chapter No. 2

Answer 13

• Auditor prepares financial statements.
• Auditor checks 100% transactions of entity during the accounting period
• .Auditor provides absolute assurance (i.e. he certifies or guarantees that financial statements are correct in all respects, and can be relied for all decision making purposes).
• Auditor is responsible to prevent and detect fraud.
• Auditor is responsible to express opinion on internal controls. *

Question 14

WHAT IS ESSENTIALS FOR PROPER CONDUCT OF AUDIT
A) INDEPENDENCE
Chapter No. 2

Answer 14

Independence means auditor should be free to perform audit procedures without any bias or influence. Auditor should be Independent of:
* Financial interests with client.
* Family and personal relationships with client
* Employment with client.
(This concept will be discussed in detail in Chapters #6&7)

Question 15

WHAT IS ESSENTIALS FOR PROPER CONDUCT OF AUDIT
A) Professional Skepticism

Answer 15

Pofessional Skepticism is an attitude that includes
* a questioning mind
* being alert to conditions which indicate possible misstatements (due to fraud or error); and
* critical assessment of audit evidence

Even if management has shown honesty and integrity in the past , still auditor shall apply professional skepticism in planning and performing throughout the audit, he shall corroborate assertions of management by obtaining pursuasive evidences

Question 16

What are Advantages/Importance of Professional skepticism?

Answer 16

Professional skepticism ensures that auditor does not:
* Overlook unusual circumstances. .
* Over-generalize when drawing conclusions from audit observations,
* Use inappropriate assumptions in determining audit procedures, and evaluating results,

Question 17

WHAT IS ESSENTIALS FOR PROPER CONDUCT OF AUDIT
A) POFESSIONAL JUDGEMENT

Answer 17

Professional Judgment is the application of Cumulative Audit Knowledge, Experience and Training (within the context of accounting, auditing, and ethical standards), to reach an appropriate course of action or conclusion during an audit.

Question 18

What are areas of professional judgement?

Answer 18

Areas where Professional Judgment is applied in:
* Planning of audit (e.g. in risk assessment, in determination of materiality).
* Performance of audit (e.g, in deciding nature, timing and extent of audit procedures, in evaluating Sufficiency and Appropriateness of audit evidences)
* Reporting Stage (in drawing conclusions based on audit evidence obtained)

Question 19

WHAT IS IFAC

Answer 19

IFAC is the worldwide leader of audit profession. It is the global organization of professional accountants dedicated to serving the public interest. IFAC has 175 members and associates in 130 countries around the world, representing approximately 3 million accountants in public practice, education, government service, industry, and commerce.

Question 20

What are functions of IFAC?

Answer 20

IFAC supports the development of profession in the area of ®auditing, ®ethics, ®professional education and ®public sector by following activities:
1. development of high-quality standards and guidance.
2. facilitating the adoption and implementation of standards and guidance.
3, promoting the value of professional accountants worldwide.
4, speaking out on public interest issues where professional voice is important.

Question 21

WHAT ARE Boards of IFAC?

Answer 21

IFAC includes following four boards:
1. International Auditing and Assurance Standards Board (IAASB)
2, International Ethics Standards Board for Accountants (IESBA)
3. International Public Sector Accounting Standards Board (IPSASB)
4. International Accounting Education Standards Board (IAESB)

Question 22

In which areas IFAC has issued standards?

Answer 22

Sir Asif book Vol 1 Flowchart, Chapter 2
Icap book page 13

Question 23

How Pocessing of developing and issuing of new ISAs is done?

Answer 23

The process of developing an ISA is as follows:
* A subject is selected for detailed study, with a view to eventually issuing an ISA.
* After a period of study and research, if there is agreement to proceed, an exposure draft is produced. The exposure draft is approved by the IAASB and then distributed widely amongst the profession and others for comment.
* Comments and proposed amendments are considered by the IAASB. The draft standard is then modified and approved by the IAASB.
* The new ISA is then published.

Question 24

What are Contents of new ISAs?

Answer 24

ISAs are written in the context of an audit of financial statements by an independent auditor. They are to be adapted as necessary when applied to audits of other historical financial statements.Each ISA contains:
* an introduction
* objectives
* definitions (if necessary)
* requirements which are shown by the word “shall” and are to be applied as relevant to the audit
* application and other explanatory material which is for guidance only

Question 25

What is the authority of ISAs?

Answer 25

In Pakistan, audit is conducted in accordance with ISAs. To obtain reasonable assurance, it is compulsory for auditors to comply with all requirements of all ISAs.

Question 26

What are Exceptions to follow requirements of ISAs?

Answer 26

A required procedure will not be performed if it is:
* not relevant or .
* not practicable,

However, if a procedure is not practicable, auditor shall document
* the reasons from the departure from the required procedure, and
* alternative procedures performed to obtain evidence/assurance