Introduction to Auditing and Overview of the Audit Process

Question 1

Assurance provided by the FS Audit

Answer 1

Auditor’s opinion is intended to enhance the credibility of the FS by providing a high but not absolute level of assurance

Question 2

Relationship of Audit Risk with evidence

Answer 2

INVERSE RELATIONSHIP:
Lower acceptable level of audit risk = more evidence
Higher Acceptable level of audit risk = less evidence

Question 3

Control Risk

Answer 3

The risk that a material misstatement that could occur will not be prevented or detected and corrected on a timely basis by related internal controls

Question 4

Can Independent external auditor also perform an operational audit and compliance audit

Answer 4

Yes, but it might be more costly since they are an independent person

Question 5

Objectives of an FS Audit

Answer 5

1. Obtain reasonable assurance that FS as a whole are free from material misstatements thereby enabling the auditor to express an opinion on whether FS are prepared in accordance with applicable financial reporting framework
2. Report on the FS and Communicate the results as required by the PSAs

Question 6

Compliance Audit (Assertion, Suitable Criteria, Report, Performed by)

Answer 6

Assertions: Activities complied with applicable laws, regulations, rules, contracts, or management policies
Suitable Criteria: Applicable laws, rules & regulations, or policies
Report: Degree of compliance
Performed by : Government Auditors

Question 7

Business Risk

Answer 7

Risk of events or activities that will prevent the entity in meeting the objectives such as wealth and profit maximization.

Question 8

General Principles of an FS Audit

Answer 8

1. Comply with relevant ethical requirements
2. Conduct an audit in accordance with PSA
3. Plan and perform audit with an attitude of professional skepticism
4. Exercise professional judgement
5. Obtain sufficient and appropriate evidence

Question 9

Audit Risk

Answer 9

Risk that auditor expresses an inappropriate conclusion when financial statements are materially misstated

Question 10

Detection Risk

Answer 10

The risk that auditor will not detect a material misstatement that exists

Question 11

Inherent Risk

Answer 11

The susceptibility of Fs to a material misstatement assuming there are no related controls

Question 12

Information Risk

Answer 12

Risk that the information prepared and presented by entity contains misstatements. Inversely proportional with reliability level.

Question 13

Definition of Auditing

Answer 13

Systematic process of objectively obtaining and evaluating evidence regarding assertions about economic and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results.

Question 14

Operational Audit (Assertion, Suitable Criteria, Report, Performed by)

Answer 14

Assertions: Operations are conducted efficiently and effectively
Suitable Criteria: Objective set by the management
Report: Report on the efficiency and effectiveness which includes recommendations to improve operations
Performed by: Internal Auditors

Question 15

Financial Statement Audit (Assertion, Suitable Criteria, Report, Performed by)

Answer 15

Assertions: Financial Statements are fairly presented
Suitable Criteria: GAAP or any identified reporting framework
Report: An opinion whether FS are presented fairly in accordance with reporting framework
Performed by: External Auditors

Question 16

Can the preparers of the FS be the only users of the FS in an audit engagement

Answer 16

No because that would entail a two party relationship which is against the three party relationship element of and FS audit

Question 17

Inherent Limitations

Answer 17

Auditor cannot obtain absolute assurance because of the following inherent limitations:
1. Use of Selective Testing
2. Inherent limitation of internal control
3. Audit evidence is persuasive rather than conclusive
4. Work done is subject to judgement
5. Nature or Characteristics of Assertion

Question 18

Elements of an FS Audit

Answer 18

1. Three party relationship
2. Appropriate Subject Matter
3. Suitable Criteria
4. Appropriate Sufficient Evidence
5. Written Audit Report (Conclusion)

Question 19

Types of Audit

Answer 19

Nature of Assertion or Data
1. Financial Statement Audit
2. Operational Audit
3. Compliance Audit
Types of Auditor
1. External Audit
2. Internal Audit
3. Government Audit

Question 20

General Principles of an Audit (CPPJA)

Answer 20

1. Must comply with relevant ethical requirement (Code of Ethics)
2. Conduct an audit in accordance with the Philippine Standards on Auditing
3. Plan and perform the audit with attitude of professional skepticism
4. Exercise professional judgement
5. Obtain sufficient appropriate evidence

Question 21

Audit process: General Approach

Answer 21

1. Entity prepares and presents the financial statements
2. The auditor performs the audit procedures
3. The auditor gathers audit evidence
4. Auditor expresses an opinion

Question 22

Theoretical Framework of FS Audit (VICBIGT)

Answer 22

1. All financial data are verifiable
2. Alway maintain independence
3. No long term conflict
4. Audit benefits the public
5. Effective internal controls reduces the possibility of errors and fraud
6. Consistent application of GAAP
7. What holds true in the past shall continue to hold true in the future

Question 23

Assertions about the classes of Transactions and Events for the period (T-OCCAC)

Answer 23

Occurrence- transactions and events that have been recorded have been recorded and pertain to the entity
Completeness- all transactions that should be recorded have been recorded
Cutoff- recorded in the in the correct accounting period
Accuracy- recorded transactions and events have been recorded appropriately
Classification- Recorded in the proper accounts

Question 24

Assertions about Account balances at the period end (A-CERV)

Answer 24

Completeness- All AL&E that should have been recorded have been recorded
Existence- AL&E exists
Rights and Obligations- A holds their rights & L are the obligations of the entity
Valuation and Allocation- AL&E are included in FS at appropriate amounts and adjustments are appropriately recorded

Question 25

Assertions about Presentation and Disclosure (P-OCAC)

Answer 25

Occurrence and Rights and Obligations- Disclosed events have occurred and pertain to the entity
Completeness- All disclosure that should been included have been included
Accuracy- disclosed fairly and at appropriate amounts
Classification and Valuation- appropriately presented and described and disclosure are clearly expressed

Question 26

Major Audit procedure

Answer 26

1. Risk Assessment Procedures
2. Test of Controls
3. Substantive Procedures

Question 27

Risk Assessment Procedures

Answer 27

obtain an understanding of the entity and its environment, including internal control to identify and assess risk of material misstatement at the FS and assertion level.

Question 28

Test of Controls

Answer 28

Designed to evaluate the operating effectiveness of controls in preventing or detecting and correcting material misstatement at an assertion level

Question 29

Substantive Procedure

Answer 29

Audit procedure designed to detect material misstatement at the assertion level; comprised of:
1. Test of Details
2. Substantive Analytical Procedures

Question 30

Specific Audit Procedures

Answer 30

1. Inspection of Records
2. Inspection of Tangible Assets
3. Observation
4. Inquiry
5. Confirmation
6. Recalculation
7. Reperformance
8. Analytical Procedures

Question 31

Test of Balances vs Test of Transactions

Answer 31

Test of Balances only checks the ending balance while test of transaction checks each transaction in the period

Question 32

Detailed Approach to an Audit (PPITC)

Answer 32

1. Preliminary Engagement Activities
2. Planning of Audit
3. Evaluation of Internal Controls
4. Substantive Testing (Evidence Gathering)
5. Completing the Audit