Auditing and assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

a) In order to conduct an audit effectively and efficiently, an auditor should properly plan for the assignment

i) Explain the matters that an auditor should take into account at the planning stage of an audit exercise (8 marks)
ii) Outline the ways in which an auditor acquires knowledge about the client‘s business and industry (4 marks)

b) The final stage of an audit includes an overall review of the financial statements. Explain the procedures that the auditor should adopt for the final review. (4 marks)
c) Highlight the qualities required of the final accounts prepared a client company.
(4 marks)
(Total: 20 marks)

ANSWER
a) In order to conduct an audit effectively and efficiently, an auditor should properly plan for the assignment.

i) Matters to be considered at the planning stage of the audit.
ISA 300 – Planning an audit of financial statements states that the auditor should plan the audit so that the engagement will be performed in an effective manner. Planning the overall audit strategy for the engagement and developing an audit plan

Matters to be considered;

Knowledge of business
– General economic factors and including conditions affecting the entity‘s business
– Important characteristics of entity, its business, its financial performance and its reporting requirements including changes since date of prior audit
– General level of competence of management

Understanding accounting and internal control systems
– Accounting policies adopted the entity and changes in those policies
– Effect on new accounting and auditing pronouncements
– Auditing cumulative knowledge of accounting and internal control systems is the relative emphasis expected to be placed on tests of control and substantive procedures

Risk and materiality
– The expected assessment of inherent and control risks and the identification of significant audit areas
– The setting of materiality levels for audit purposes
– Possibility of material misstatement, including experience of past periods or fraud
– Identification of complex accounting areas including those involving accounting estimates

Nature, timing and extent of procedures
– Possible change of emphasis on specific audit areas
– Effect of information technology on the audit
– Work of internal auditing and its expected effect on external audit procedures

Co-ordination, Direction, Supervision and Preview
– Involvement of other auditors in audit of components e.g subsidiaries, branches and divisions
– Involvement of experts
– Number of locations
– Staffing requirements

Other matters;
– Possibility that going concern assumption may be put to question

– Conditions requiring special attention, such as the existence of related parties
– Terms of engagement and any statutory responsibilities
– Nature, timing of reports or other communication with the entity that are expected under the engagement

ii) Ways of acquiring knowledge of business and industry
According to ISA 310 – Knowledge of business, such methods are;
• Previous experience with entity and industry
• Discussion with the people of the entity e.g. directors, senior operating personnel
• Discussion with internal audit personnel and review of internal audit reports
• Discussion with other auditors and with legal and other advisors who have provided services to entity or within the industry
• Discussion with knowledgeable people in the entity e.g. industry economists, industry regulators, customers, suppliers and competitors
• Publications related to industry e.g. government statistics, surveys, texts, trade journals, reports prepared banks and security dealers, financial newspapers etc
• Legislation and regulations that significantly affect the entity
• Visits to entity‘s premises and plant facilities
• Documents produced entity e.g.

Minutes of meetings

Material

sent to shareholders
 
Material filed with regulatory authorities
Promotional literature
 
Prior years annual and financial reports
Budgets
 
Interim financial reports
Management policy manual

Manuals of accounting and internal control systems

The auditor can also consider;
i) General economic factors such as;
– General economic activity
– Interest rates and availability of financing
– Inflation, currency revaluation
– Government policies
– Monetary
– Taxation
– Tariffs, trade restrictions
– Fiscal
– Financial incentives

ii) Industry – Important conditions affecting client‘s business
– Market and competition
– Cyclical or seasonal activity
– Changes in product technology
– Business risk
– Adverse conditions as declining demand
– Key ratios and operating statistics
– Specific accounting practices and problems
– Environmental requirements and problems

– Regulatory framework
– Energy supply and cost

b) Before forming an opinion on the financial statements and deciding on the wording of the audit report, the auditor should conduct an overall review of statements
Audit procedures for final review

• Accounting policies
Consider if they;
– Are in accordance with generally accepted accounting principles and comply with fundamental accounting concepts as going concern, accruals, consistency and prudence.
– Are acceptable to particular circumstances
– Are commonly adopted in a particular industry
– Are consistently applied over the years
– Are consistently applied throughout the enterprise
– Comply with all relevant accounting standards

• Circumstances of enterprise
– Consider if the accounts are consistent with the auditor‘s knowledge of underlying circumstances of the business and information.
– Review information in the accounts to determine if there are any abnormalities or inconsistencies

• Presentation and disclosure
– Consider in any conclusion that a reader might draw from his reading of the accounts would be justified and is consistent with the circumstances of the enterprise
– Consider if the substance of any transactions or activities is disclosed and not merely their form
– Consider if the presentation might have been unduly influenced management‘s desire to present facts in a favourable light
– Consider if the review has indicated that there are few factors which might alter the policies used or the presentation of the accounts, and special attention needs to be paid to going concern difficulties.

c) Qualities of final accounts

i) That they use acceptable accounting principles which have been consistently
applied and are appropriate to business

ii) The results of operations; income statement, state of affairs; Balance sheets and all other information included in financial statements are compatible with each other and with auditor‘s knowledge of enterprise

iii) There is adequate disclosure of all appropriate matters and the information contained in financial statements is suitably classified and presented e.g. a loan to subsidiary should not be described as cash at bank

iv) There is compliance with statutory requirements e.g. the Companies Act

v) There is compliance with other relevant regulations e.g. stock exchange regulations.

vi) There is compliance with accounting standards.



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