Chapter 2: Basic concepts of auditing

Question 1

Professional Skepticism [3]

Answer 1

an attitude that includes:
1. a questioning mind
2. being alert to conditions which indicate possible misstatement (due to error or fraud)
3. critical assessment of audit evidence.

Question 2

Effect on the course of audit if management has shown honesty and integrity in past

Answer 2

Even if management has shown honesty and integrity in past, still auditor shall apply professional skepticism in planning and performing the audit. He shall corroborate every assertion of management, by obtaining persuasive evidence

Question 3

Importance of Professional Skepticism [6]

Answer 3

1. To identify risk of material misstatements
2. To critically assess audit evidence
3. To determine sufficiency and appropriateness of audit evidence.

it helps to avoid:
1. Overlooking unusual circumstances
2. Over-generalizing when drawing conclusions from audit observations
3. Using inappropriate assumptions in determining audit procedures, and evaluating results.

Question 4

Expectation Gap meaning

Answer 4

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 5

Some Common Misunderstandings (i.e. Expectation Gap) about Audit [5]

Answer 5

Auditor:
1. Prepares F/S
2. checks 100% transactions
3. provides absolute assurance
4. prevents and detects fraud
5. expresses opinion on internal controls

Question 6

How to Reduce Expectation Gap [4]

Answer 6

1. Mentioning management’s responsibilities, and auditor’s responsibilities in Engagement Letter and Auditor’s Report.
2. Expanding and improving the format of auditor’s report to clarify responsibilities of auditor.
3. Implementation of regulations to explain responsibilities of management/directors e.g. Code of Corporate Governance by SECP.
4. Public awareness on scope of audit and responsibilities of auditor.

Question 7

Highlight the management’s responsibilities relating to the financial statements [3+3]

Answer 7

1. Preparation and presentation of financial statements in accordance with AFRF
2. design and implementation and operating effectiveness of such internal controls which are necessary for preparation of reliable financial statements
3. To provide auditor with:
   - all relevant information
   - additional information requested
   - unrestricted access to persons within the entity