Lesson 1 : What is a audit?

Question 1

What is an Audit?

Answer 1

A financial audit is an objective examination and evaluation of the financial statements of an business to make sure that the financial records are a fair and accurate representation of the transactions they claim to represent.

Question 2

What 2 things are needed to do an audit?

Answer 2

1. There must be information in a verifiable form and criteria by which the auditor can evaluate the information
2. audit should be done in accordance to legislation of each individual country and accounting standards (international acs /irs)

Question 3

What is the difference between auditing and accounting?

Answer 3

Accounting is the recording of transactions and summarising on financial statements for decision making … whereas
… auditors focus on determining whether recorded data properly reflects the economic events that occurred in the accounting period.

Question 4

In addition to understanding accounting, auditors must possess expertise in the accumulation and interpretation of audit evidence. True or false?

Answer 4

True

Question 5

Why is there an economic demand for auditing?

Answer 5

Because Business owners (principal) hire agents aka mangers to run the business daily, which makes them accountable to provide financial reports to the principal. In doing so they hire auditors to report on the fairness of their financial reports to reduce the information risk.

Question 6

What is information risk ?

Answer 6

Information risk reflects the possibility that the information upon which the business decision was made upon is inaccurate

Question 7

State the 2 main objectives of auditing?

Answer 7

1. to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement like fraud or error , which enables the auditor to make a judgement on whether financial statements are prepared in accordance to the criteria.
2. To report on the financial statements and communicate as required by the isa in accordance to the auditors findings.

Question 8

Who makes “ assertions and claims “about the financial statements ?

Answer 8

The management

Question 9

Who’s job is it to validate theses said claims?

Answer 9

The auditors

Question 10

How do auditors validate the managements assertions?

Answer 10

They do so by identifying audit objectives , which can be regarded as the auditors counterpart of management assertions.

Question 11

State the 3 topics financial assertions are made on ?

Answer 11

1. Assertions about classes of transactions
2. Assertions about account balances at the period
3. Assertions about presentation and disclosure

Question 12

State the 9 general claims that are made on financial statements

Answer 12

Occurrence
Completeness
Authorisation
Accuracy 
Cut-Off
Classification
Existence 
Rights and Obligations
Valuation

Question 13

What assertions can be made about classes of transactions?

Answer 13

Occurrence
Completeness
Authorisation
Accuracy 
Cut-Off
Classification

Question 14

What assertions can be made about account balances at the period?

Answer 14

Existence
Rights and Obligations
Completeness
Valuation

Question 15

What assertions can be made about presentation and disclosure?

Answer 15

Occurrence
Rights and Obligations
Completeness
Classification
Valuation

Question 16

Define the term Occurrence

Answer 16

Transaction and events that have been recorded have occurred and pertain to the entity

Question 17

Define the term Completeness

Answer 17

All transactions and events that should have been recorded.

Question 18

Define the term Accuracy

Answer 18

Amounts and other data relating to recorded transactions and events have been recorded appropriately

Question 19

Define the term Cut-Off

Answer 19

Transactions and events have been recorded in the correct accounting period.

Question 20

Define the term Classification

Answer 20

Transactions and events have been recorded in the proper accounts

Question 21

Define the term Existence

Answer 21

Assets, Liabilities and equity interests exist.

Question 22

Define the term Completeness

Answer 22

All assets liabilities and equity and interests that should have been recorded have been recorded

Question 23

Define the term valuation and allocation

Answer 23

Assets ,liabilities and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded.

Question 24

What is the expectation gap?

Answer 24

Expectation gap is the difference between public perception of an auditor’s role and responsibilities regarding audit engagements and what the auditor’s legal responsibilities actually are.

Question 25

What two categorise do expectation fit into?

Answer 25

Performance gap and Liability gap

Question 26

State 4 expectation gaps

Answer 26

1. Some users incorrectly believe that an audit provides absolute assurance that the audit opinion is a guarantee the financial statements are ‘correct’.
2. A belief that auditors test all transactions and balances; they test on a sample basis.
3. A belief that auditors are required to detect all fraud; auditors are required to provide reasonable assurance that the financial statements are free from material misstatement, which may be caused by fraud.
4. Auditors provide reasonable assurance which is not absolute assurance

Question 27

State the 3 A’s services

Answer 27

Auditing, Attest, and Assurance

Question 28

Define Attestation

Answer 28

In an attestation engagement, an accountant expresses an opinion on the reasonableness of a particular assertion or set of assertions. Examples of assertions covered by attestation engagements include financial forecasts and compliance with laws or procedures.

Question 29

what do assurance services do?

Answer 29

Independent professional services that improve the quality of information, or its context, for decision makers.

Question 30

state and define 3 types of audits

Answer 30

1. Audit of financial statements - examine financial statements, determine if they give a true and fair view or fairly present the financial statements.
2. Operational Audit - study of a specific unit of an organization for the purpose of measuring its performance (efficiency and effectiveness)
3. Compliance Audit -review of an organization’s procedures and financial records performed to determine whether the organisation is following specific procedures, rules or regulations set out by some higher authority.

Question 31

Name 4 types of auditors

Answer 31

1. Internal auditors
2. Independent auditors
3. government auditors
4. Forensic auditors

Question 32

How many stages are in the auditing process

Answer 32

4

Question 33

What are the 4 stages?

Answer 33

Stage I – Client acceptance
Stage II – Planning
Stage III – Testing and evidence
Stage IV – Evaluation and Judgement.