chp 2 # basic concepts of auditing

Question 1

What is included in Complete Set of Financial Statements?

[Chapter 2]

Answer 1

1. Balance Sheet.
   2.Income Statement
   3.Cash Flow Statement.
   4.Statement of changes in equity.
   5.Notes to the Accounts.

Question 2

What are two major parts of an Annual Report issued by a company?

[Chapter 2]

Answer 2

1.Financial Statements, and Auditor’s Report)
2.Other Information (e.g. Directors’ Report)

Question 2

What is the difference between General Purpose Framework and Special Purpose Framework?

[Chapter 2]

Answer 2

1. General Purpose Framework is used for wide range of users.
2. Special Purpose Framework is used for specific users. [distribution of such F/S may be restricted]

Question 3

Define Fair Presentation Framework?

[Chapter 2]

Answer 3

A framework that requires compliance with requirements of the framework and contains acknowledgment that, to achieve fair presentation, it may be necessary for management:

1.To provide disclosures in addition to specific requirements of framework or
2.To depart from a requirement of framework

Question 4

How opinion is expressed in Fair Presentation Framework?

[Chapter 2]
.

Answer 4

In any one of following ways:

1.“financial statements give true and fair view in accordance with the framework”, or
2.“financial statements are presented fairly, in all material respects, in accordance with the framework”.

Question 5

Define Compliance Framework?

[Chapter 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 opinion is expressed in Compliance Framework?

[Chapter 2]

Answer 6

“financial statements are prepared, in all material respects, in accordance with the framework”

Question 7

Give one example of Fair Presentation Framework and Compliance Framework?

[Chapter 2]

Answer 7

Fair Presentation Framework = IFRS
Compliance Framework = Tax Basis

Question 8

Define Applicable Financial Reporting Framework?

[Chapter 2]

Answer 8

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.

Question 9

What is the difference between Management and TCWG?

[Chapter 2]

Answer 9

1.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

How an audit is affected if Financial Reporting Standards are Supplemented by Local Laws?

[Chapter 2]

Answer 10

1.Both become AFRF.
2.Auditor shall comply with both.
3.If both are in conflict, auditor shall comply with local laws.

Question 11

What is the difference between External and Internal Auditor?

[Chapter 2]

Answer 11

1.Appointment (External auditor appointed by Shareholders, Internal by Directors)
2.Reporting (External auditor reports to Shareholders, Internal to Directors)
3.Independence (External auditor is independent of entity, Internal is not but he should be independent of management)

Question 11

What are different department/sources within the entity from whom evidence can be obtained?

[Chapter 2]

Answer 11

1.Accounts and Finance Department (Sales System, Purchase System, Payroll System, Inventory & Fixed Assets System, Cash & Bank System)
2.Human Resource Department (number of employments, increments, bonuses, joiners, leavers)
3.Legal Department (detail of cases against company)
4.Marketing Department (sale trend of products, selling commission)
5.IT department (IT system relevant to F/S)
6.Research & Development (activities in development phase)
7.Internal Audit Department (monthly reports sent to TCWG)

Question 12

Give some examples when Internal Auditor will NOT be Independent of Management?

[Chapter 2]

Answer 12

1.If internal auditor reports to management (i.e. CFO/CEO).
2,If internal auditor is a friend of management.
3.If hiring, firing, promotion, job-description are decided by management.
4.If internal auditor performs managerial functions.

Question 13

Define True and Fair View?

[Chapter 2]

Answer 13

> true means free from errors, and
fair means free from undue bias in preparation or presentation of financial statements.

Question 14

What is the responsibility of Management and TCWG regarding Financial Statements?

[Chapter 2]

Answer 14

1.To prepare Financial Statements in accordance with AFRF.
2.For design, implementation and operating effectiveness of internal controls.
3.To provide auditor with all relevant information, additional information, and unrestricted access to persons within the entity.

Question 15

What is meant by Premise of an Audit?

[Chapter 2]

Answer 15

Premise of an Audit means Management understands and acknowledges its responsibilities.

Question 16

In addition to Overall Responsibilities, management also has some specific responsibilities (i.e. area specific). List some of them.

[Chapter 2]

Answer 16

1.For Going Concern.
2.For Subsequent Events.
3.For Related Parties.
4.For Fraud.

Question 17

Give some examples of internal control activities performed by management.

[Chapter 2]

Answer 17

1.Authorization.
2.Physical Counting of assets.
3.Reconciliations.
4.Segregation of duties.
These activities can be performed in different areas.

Question 18

What is auditor’s overall responsibility/objective?

[Chapter 2]

Answer 18

1.To obtain reasonable assurance whether financial statements are free from material misstatement, and issue report, and
2.To communicate matters which are required by ISAs (e.g. to directors, regulators).

Question 19

How can auditor justify if there is a misstatement even after his unmodified audit report?

[Chapter 2]

Answer 19

Auditor can justify on two basis:
1. Misstatement is Immaterial.
2. Auditor has obtained reasonable assurance by performing all procedures required by ISAs, and this misstatement is due to inherent limitations of audit.

Question 20

Give some examples of matters which are communicated to directors:

[Chapter 2]

Answer 20

> Significant deficiencies in internal control.
Modifications in audit report.
Management Integrity Issues
Auditor’s independence issues
Non-Compliance with Laws and Regulations
Withdrawal by auditor.

Question 21

Give some examples of Expectation Gap.

[Chapter 2]

Answer 21

> > Auditor prepares financial statements.
Auditor checks 100% transactions.
Auditor provides absolute assurance.
Auditor is responsible to prevent and detect fraud.
Auditor is responsible to express opinion on internal controls.

Question 22

How Expectation Gap can be reduced?

[Chapter 2]

Answer 22

1.Mentioning responsibilities in Engagement Letter and Auditor’s Report.
2.Expanding and improving the format of auditor’s report.
3.Implementation of regulations.
Public awareness.

Question 23

Define Professional Judgment.

[Chapter 2]

Answer 23

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 24

Give examples of areas in which auditors applies Professional Judgment.

[Chapter 2]

Answer 24

1.Risk assessment.
2.Materiality.
3.Audit procedures.
4.Evaluating evidence.

Question 25

Define Professional Skepticism.

[Chapter 2]

Answer 25

Professional skepticism is an attitude that includes:
(i) a questioning mind,
(ii) being alert to conditions which indicate possible misstatement, and
(iii) critical assessment of audit evidence.

Question 26

What is the importance of applying professional skepticism in an audit.

[Chapter 2]

Answer 26

1.Professional skepticism is necessary:

To identify risk of material misstatements.
To critically assess audit evidence, and
To determine sufficiency and appropriateness of audit evidence.
2.Professional skepticism helps to avoid:

Overlooking unusual circumstances.
Over-generalizing.
Using inappropriate assumptions.

Question 27

Give some examples of situations when an auditor is not independent of its client?

[Chapter 2]

Answer 27

1.When auditor has financial interest (e.g. holds shares, obtains loan, business relationship)
2.When auditor has personal relationship (e.g. family member works at client, Long association, Gift is accepted).
3.When auditor has employment relationship (e.g. when auditor has been past employee of client)

Question 28

List some functions/roles/activities of IFAC.

[Chapter 2]

Answer 28

development of high-quality standards and guidance.
facilitating the adoption and implementation of standards and guidance.
promoting the value of professional accountants worldwide.
speaking out on public interest issues.

Question 29

List Boards of IFAC.

[Chapter 2]

Answer 29

International Auditing and Assurance Standards Board (IAASB)
International Ethics Standards Board for Accountants (IESBA)
International Public Sector Accounting Standards Board (IPSASB)
International Accounting Education Standards Board (IAESB)

Question 30

List some functions/roles/activities of IAASB:

[Chapter 2]

Answer 30

> > Develops and promotes standards for audit, review and related services.
Provides facilitation in adoption and implementation of international standards.
Issues International Auditing Practice Statements (IAPS).

Question 31

What are different types of engagement and different types of standards used for them:

[Chapter 2]

Answer 31

Audit Engagement à Performed as per ISAs (200 – 800 series)
Review Engagement à Performed as per ISREs (2400 series)
Assurance Engagements (other than Audit & Review) à Performed as per ISAEs (3000 series)
Related Services à Performed as per ISRSs (4400 series)

(Note this concept is optional for students)

Question 32

What is the process of Developing and Issuing a new ISAs?

[Chapter 2]

Answer 32

1.A subject is selected.
2.An exposure draft is produced, and distributed.
3.Comments received, and amendments made.
4.The new ISA is then published.

Question 33

What are different contents of an ISA.

[Chapter 2]

Answer 33

Introductory Material, Objectives, Definition.
Requirements.
Application and Other Explanatory Material (including Appendices).

Question 34

What is the Authority/Status of ISAs.

[Chapter 2]

Answer 34

Auditor has to comply with all requirements of all ISAs, unless it is not relevant or not practicable.

Question 35

What shall be auditor’s course of action if requirement of an ISA is not practicable?

[Chapter 2]

Answer 35

1.Auditor shall document reason.
2.Auditor shall perform alternative 3.procedures to obtain evidence.