Auditing

Chapter 1
Q1. Define Auditing? Evidence?
 is the accumulation and evaluation of evidence about information to determine and
report on the degree of correspondence between the information and established
criteria.
- Auditing should be done by a competent independent person.
- To do an audit, there must be information in a verifiable form and some
standards criteria by which the auditor can evaluate the information.

 Definition of Evidence: is any information used by the auditor to determine whether the
information being audited is stated in accordance with the established criteria.
Example of evidences
1. Transaction data
2. Client Testimony
3. Written and electronic Communications with outsiders
4. Observations
 Audit Report is The final step communicates the findings to users.

Q2. Distinguish Between Auditing and Accounting?

Accounting: is the recording, classifying, and summarizing of economic events for the purpose
of providing financial information used in decision making.
Auditing: is determining whether recorded information properly reflects the economic events
that occurred during the accounting period.

Q3. Define audit risk and causes of audit risk and how to reduce it ?
 Definition of audit risk: Information risk reflects the possibility that the information
upon which the business decision was made was inaccurate.

 Causes of Information Risk

1. Remoteness of information: It is nearly impossible for a decision maker to have much
firsthand knowledge about the organization with which they do business.

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 - Information from others must be relied upon.
2. Biases and motives of the provider: If information is provided by someone whose goals
are inconsistent with those of the decision maker, the information may be biased in
favor of the provider.
3. Voluminous data: The higher the volume of transactions, the greater the risk that
improperly recorded information is included in the records.
4. Complex exchange transactions: Exchange transactions between organizations have
become increasingly complex and therefore more difficult to record properly.
 Reducing Information Risk
1. User verifies information: The user may go to the business premises to examine records
and obtain information about the reliability of the statements.
2. User shares information risk with management There is considerable legal precedent
that management is responsible for providing reliable information to users.
3. Audited financial statements are provided

Q4. What are Relationships Among Auditors, Client, and External Users
1. Client: Client provides financial statements to users
- Client or audit committee hires auditor
2. Auditor: Auditor issues report relied upon by users to reduce information risk
3. External Users: Provides capital
Q5. Define assurance service, attestation service and other assurance service?
 Assurance Services: An independent professional service Can be performed by CPAs
or by a variety of other professionals

 Attestation Services: A type of assurance service, CPA reports on the reliability of an

assertion, That is the made by another party
 Other Assurance Services: Most of the other assurance services that CPAs provide
do not meet the formal definition of attestation services.
- The CPA is not required to issue a written report.
- The assurance does not have to be about the reliability of another party’s
assertion about compliance with specified criteria.

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Examples
1. Controls over and risks related to investments
2. Compliance with entertainment royalty agreements
3. ISO 9000 certifications
4. Corporate responsibility and sustainability

Q5. What are types of audits?

1. Operational audit evaluates the efficiency and effectiveness of any part of an
organization's operating procedures and methods.

2. Compliance audit is conducted to determine whether the auditee is following specific

procedures, rules or regulations set by some higher authority.

3. Financial Statement

Q6. What are types of auditors ?

Types of Auditors
1. Certified public accounting firms (External Auditor)
2. Governmental accountability office auditors
3. Internal Revenue agents
4. Internal auditors
Q7. What are Three Requirements for Becoming a CPA?

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 1. Educational requirement
2. Uniform CPA examination requirement
3. Experience requirement
Q8. What are CPA Examination Sections?
1. Auditing and Attestation
2. Business Environment and Concepts
3. Financial Accounting Reporting
4. Regulation

Chapter 3 Audit Reports

Q1. What are Parts of standard audit report?
1. Report title: Title should include the word independent (e.g., independent audit
2. Audit report address: Report is usually addressed to the company, its stockholders or board
of directors.
3. Introductory paragraph : The intro paragraph does 3 things:
1. States the CPA firm has done an audit
2. It lists the financial statements that were audited
3. It defines responsibilities between management and the auditor
4. Management’s Responsibility
5. Auditor’s Responsibility: The scope paragraph is a factual statement about what the auditor
did in the audit and sets the expectation about reasonable assurance.
6. Opinion Paragraph: The opinion paragraph states the auditor’s conclusions.
7. Name and Address of CPA firm: The name identifies the CPA firm who performed the audit.
8. Audit report date: The report date indicates the last day audit procedures were performed in
the field.

Reporting on internal control over financial reporting

- Auditors of public companies subject to Section 404 of the Sarbanes Oxley Act
must report on the effectiveness of internal control over financial reporting.
- PCAOB Auditing Standard 5 requires the audit of internal control to be integrated
with the audit of the financial statements.

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Q2. What are conditions for Unqualified (standard) report ?
1. Includes all financial statements
2.Sufficient appropriate evidence
3.Financial statements present in accordance with U.S.GAAP or IFRS
4. No circumstances require an explanatory paragraph or report modification

Q3. Why auditor issue Unqualified report with explanatory paragraph ?

A. Lack of consistent application of generally accepted accounting principles
- Auditors must note circumstances in which accounting principles are not
consistently applied
- Auditor should modify the report when a material change occurs by adding an
explanatory paragraph in the report
B. Substantial doubt about going concern
- Significant operating losses or working capital deficiencies.
- Inability of the company to pay its obligations as they come due.
- Loss of major customers, the occurrence of uninsured catastrophes.
- Legal proceedings, legislation that might jeopardize the entity’s ability to
operate.
C. Auditor agrees with a departure from promulgated accounting principles
- Circumstances are unusual
- Departure may not require a qualified or adverse opinion
- The auditor must separately explain in the audit report that adhering to the
principle would have produced a misleading result.
D. Emphasis of a matter
Under certain circumstances, the CPA may want to emphasize specific matters regarding the
financial statements, even though the CPA intends to express an unqualified opinion.
- Subsequent Events
- Related Party Transactions
E. Reports involving other auditors
- Make no reference in the audit report
- Make reference in the report (modified wording report)
- Qualify the opinion

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Q4. Why auditor departures from unqualified opinion ?
1. Scope limitation: Scope limitations are when the auditor has not accumulated sufficient
appropriate evidence to conclude whether the financial statements are stated in
accordance with GAAP.
2. GAAP departure: Client insists on using a method that is not consistent with GAAP.
3. . Auditor not independent

Q5. Why audior issue a qualified opinion report ?

a qualified opinion report can result from a limitation on the scope of the audit or failure to
follow generally accepted accounting principles.
- A qualified report can take the form of a qualification of both the scope and the
opinion or of the opinion alone
Q6. Why auditor issue Adverse opinion ?
- Auditor believes the financial statements are not presented fairly in conformity
with GAAP.
- It is used only when the auditor believes that the overall financial statements
are so materially misstated or misleading that they do not present fairly the
financial position or results of operations and cash flows in conformity with GAAP
Q7. Why auditor issue Disclaimer opinion?
- Can arise only from a lack of knowledge by the auditor.
- Issued when the auditor is unable to be satisfied that the overall financial
statements are fairly presented.
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Q8. Define Materiality?and its levels?
 Materiality defined as A misstatement in the financial statements can be considered
material if knowledge of the misstatement would affect a decision of a reasonable
user of the statements.
- Materiality is an essential consideration in determining the appropriate type of
report for a given set of circumstances.

Levels of materiality
1. Amounts are immaterial.

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 2. Amounts are material but do not overshadow the financial statements as a whole.
3. Amounts are so material or so pervasive that overall fairness of the statements is in
question.

Chapter 6
Q1. Explain the objective of conducting an audit of financial statements and an audit of
internal controls.
The purpose of an audit is to provide financial statement users with an opinion by the auditor
on whether the financial statements are presented fairly, in all material respects, in accordance
with applicable financial accounting framework.
Q2. Compare between management responsibility and auditor responsibility?
 Management responsible on preparing Financial statements and internal controls.
Sarbanes Oxley increases management s responsibility for the financial statements.
CEO and CFO must certify quarterly and annual financial statements submitted to the SEC.
The Sarbanes Oxley Act provides for criminal penalties for anyone who knowingly falsely
certifies the statements.
 Auditor responsibility

Q3. What are four stages of financial statements audit ?

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 Chapter 7
Q1. Identify the four audit evidence decisions that are needed to create an audit program.
1. Which audit procedures to use
2. What sample size to select for a given procedure
3. Which items to select from the population
4. When to perform the procedures (timing)

Q2. Specify the characteristics that determine the persuasiveness of evidence.

The persuasiveness of evidence can be evaluated only after considering the combination of
appropriateness and sufficiency.
Q3. What are six characteristics of reliable evidence ?
1. Independence of provider
2. Effectiveness of client’s internal controls
3. Auditor’s direct knowledge
4. Qualification of individuals providing the information
5. Degree of objectivity
6. Timeliness
Q3. Identify and apply the eight types of evidence used in auditing?
1. Physical Examination: It is the inspection or count by the auditor of a tangible asset
- This type of evidence is most often associated with inventory and cash.
2. Confirmation:

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 3. Inspection: It is the auditor’s examination of the client’s documents and records.
Internal documents or External documents
4. Analytical procedures:
A. Understand the client s industry and business
B. Assess the entity s ability to continue as a going concern
C. Indicate the presence of possible misstatements in the financial statements
D. Reduce detailed audit tests
5. Inquires of client: It is the obtaining of written or oral information from the client in
response to questions from the auditor.
6. Recalculation: Involves rechecking a sample of calculations made by the client.
7. Reperformace: The auditor’s independent tests of client accounting procedures or
controls that were originally done as part of the entity’s accounting and internal control
system.
8. Observations: Use one’s senses to assess client activities.
- Tour plant to obtain a general impression of client’s facilities.
- Observation is rarely sufficient by itself.
- Often need to corroborate with another kind of evidence.

Q4. Understand the purposes of audit documentation?

Audit documentation is the record of the audit procedures performed, relevant audit evidence,
and conclusions the auditor reached
Q5. Compare between internal and external documents?
 internal document has been prepared and used within the client’s organization and is
retained without ever going to an outside party
- Internal documents include duplicate sales invoices, employees’ time reports,
inventory receiving reports
 An external document has been handled by some one outside the client’s organization
who is a party to the transaction being documented, but that is either currently held by
the client or readily accessible Internal documents include vendors’ invoices, cancelled
notes payable, insurance policies