FILE 20201125 124759 auditing part 1 2 3

Question 1: Define the term auditing and its elements in the definition? Distinguish auditing and accounting ? Definition of auditing: “Auditing is a process in which independent and competent auditors collect and evaluate of evidence about audited information to determine and report on the degree of correspondence between the information and established criteria” Elements of the definition of auditing: - A process: include phases: planning, implementing and completing - Independent and competent auditors: + Independence in fact: maintains an unbiased attitude, follows the auditing standards and obeys the law + Independence in appearance: shouldn‟t be influenced by the client‟s interest and close relationships + Competence: qualification, skills, ethics and factors needed to effectively manage and confirm the correctness of a company‟s accounting procedures - Collect and evaluate of evidence: Evidence is any information or document which is used by auditor to analyze, measure and draw conclusion based on it Evidence must be sufficient and appropriate - Audited information (=audit project): audited information can be financial and non financial information + First, it is financial information which is presented on FSs + Second, it is operation information + Third, it is compliance information - Established criteria: Ex: in FSs audit, established standards include: accounting standards, regulations and law - Reporting (=give opinion): it shows auditor‟s opinion about degree of correspondence between information and established criteria Distinguish auditing and accounting: Basic for comparision Meaning Accounting Auditing Accounting means systematically keeping the records of the accounts of an organization and preparation of financial Auditing means inspection of the books of account and financial statements of an organization Governed By Work performed by Purpose Start Period statements at the end of the financial year Accounting Standards Standards on Auditing Accountant Auditor To show the performance, To reveal the fact, that to profitability and financial which extent financial position of an organization statement of an organization gives true and fair view Accounting starts where Auditing starts where bookkeeping ends accouting ends Accounting is a continous Auditing is a periodic process, i.e day to day process recording of transactions are done Question 2: Identify differences among internal audit, independent audit and state audit ? Internal audit Under the business owner of the unit If the unit does not have the Board of Directors, the Organization internal audit structure belongs to the Director If there is a Board of Directors, the internal audit will be directly under Independent audit National, regional and international professional auditing firms and groups State audit Depending on each State, the state audit can be under the National Assembly, the Court, the controlling institute, can be under the Government, or the president, Auditor Conditions to operation the Chairman of the Board of Directors Internal auditors are the bosses who appoint and use Are experts or professional independent auditors According to By contract or the plan invitation to audit approved by the business owner, the unit, or according to the owner's decisions, orders or requests No audit fees Boss Collecting audit fees according to regulations and markets Customer Has no legal validity Has high legal value Audit fee Reporting Legal value Are the state auditors or government officials on duty according to regulations According to the plan approved by the agency to which the state audit is affiliated, or as determined by the order, directive or request of the agency with which it operates No audit fees Agency to which it belongs Has high legal value Question 3: Identify differences among FS audit, performance audit and compliance audit ? Performace audit Compliance audit Purpose Subject matter Standards Financial statement audit To evaluate the economy, effectiveness nd efficiency of the organization‟s operations and consulting To consider and evaluate the audited firms comply the rules and regulation set by some higher authorities and make recommendation To determine whether the overall the information being verified in the financial statements are states in accordance with specified criteria Subject of performance audit can be various and diversified The fact of compliance the regulations and law of competent state agencies and audited business FSs (such as: balance sheet, income statement, cash flow statement and notes) or interpretation of financial statement of businesses The regulations and law of competent state agencies and audited business Accounting standards, law regulations and other related rules Auditors Function Report types of auditors types of auditors types of auditors Consultation Confirmations & recommendation Confirmations & consultation Managers to inform about results and recommend to improve a business performance Users as the business or business managers with audited resulted, not to serve general users Audit result will be reported to the entity who hires the auditing firm Question 4: What are the causes of information risk in the market economy ? List some ways to reduce information risk ? - The causes of information risk in the market economy: + The big gap between the users and supplier of information and adjustment of information which may benefit the supplier + The great volume of information + The increased complexity of information and economic activities + Incorrect treatment of information - The three main ways to reduce information risk + User verifies the information + User shares the information risk with management or supplier of information + User uses audited financial statements provided independent auditors Question 5: List some functions and roles of auditing in the market economy? Function of auditing: + Firstly, examination and confirmation, or verification function This function is established together with the first introduction of auditing and developed rapidly until now + Secondly, consultancy functions The consulting function ranges from simple suggestions for improving the client‟s businesses more effectively to advice in their development strategies, and actuarial benefit consulting The role of independent audit organization + The independent audit organization plays role as an independent party (third party) presenting examination and confirmation function, and gives an opinion about the true and fair view of audited information + The user information has reliance basis to give his decision suitably + The result of audit also helps audited entity to see themselves objectively + In addition, the audit consultation in the management letter will help top of management to give the necessary adjustment in business as well as management task The role of state audit: State Audit organization plays role as management tool of the State, especially in expenditure State budget It helps to improve and strengthen management of State agencies, or organizations in compliance with law and other regulations such as the business law, the added value tax law, the environment protect law, and accounting law… The role of internal audit : Internal audit organization plays role as manageable tool of top of management in the enterprise It serves for governance activity of firm itself, particularly the elements of assurance, risk, and control Question 6: List some services which independent auditor provide The main activity of the independent audit organization is to provide audit services, in addition to also perform some other services for the client unit Common services of independent audit organizations are: - Verification service: is the performance of the audit and giving confirmation about the reliability of the financial information of the audited entity - Accounting services: including keeping books, recording accounting books, synthesizing financial information, preparing financial statements, organizing the accounting work and accounting apparatus for customers, in case In this case, the audit organization does not perform the testing but rather provides the service on the basis of the documents provided by the customer - Consulting service: is the service that auditing organizations usually undertake related to the expertise, capabilities of auditing organizations and according to the law of each country Consulting services include: + Tax consulting + Consulting on human resources + Management consulting - Financial information checking service based on agreed procedures: audible financial information can be individual items of financial statements, a part of financial statements, - Other services: property valuation services, training services, updating knowledge of finance, accounting, auditing Question 7: List the specific objectives of internal auditing The objectives of an internal audit are to: - The economic operations presented on the books must have sufficient grounds for recording (with reasonable grounds) - The economic operations must be properly approved (approval) - The arising economic transactions, assets in actual existence must be recorded in full (completeness) - The economic transactions and existing assets must be accurately calculated and recorded according to an appropriate value (evaluation and calculation) - The economic operations are properly classified (classification) - Economic operations must be promptly reflected (promptly) - Economic transactions must be properly recorded in detailed books and accurately synthesized and presented in the financial statements in accordance with regulations (cumulative and presentation) Question 8:The level of assurance provided by an external audit is absolute Is this statement true or false? Explain False “is absolute” => “is reasonable” Because of limitations inherent in the auditing process restrict the ability to guarantee assurance Question 9: The independent audit firms only conduct to audit financial statements True or false Explain False The independent audit firms conduct to audit types of audited information: FSs, performance, compliance, last mostly FSs Question 10: What is auditing standards? Explain why it is important for audits to be conducted in accordance with auditing standards? - Auditing standards are general guideline and regulations of basic principle, procedures to aid auditor in fulfilling their professional responsibilities in the audit - It is important of auditing: + They primarily are priciples and guide for auditors to best complete his tasks + They are uses by auditing firms and other entities to measure and eraluate the task fulfillment of audits + They can be the base for audited firms and related parties to co-operate in auditing process and issuing audited results + The relationship between national and international auditing standards + The content and legal form of standards on auditing Question 11: List the Code of ethics for independent auditing - Integrity Members should be straightforward and honest in all professional and business relationships -Objectivity Members should not allow bias, conflicts of interest or undue influence of others to override professional or business judgements -Professional competence and due care 14 Members have a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and techniques Members should act diligently and in accordance with applicable technical and professional standards -Confidentiality Members shall respect the confidentiality of information acquired as a result of professional and business relationships and, should not disclose any such information to third parties without proper and specific authority, or unless there is a legal or professional right or duty to disclose Confidential information acquired as a result of professional and business relationships should not be used for the personal advantage of members or third parties -Professional behaviour Members should comply with relevant laws and regulations and avoid any action that discredits the profession Question 12: List the threats that impair objectivity of the auditor and give some examples - Self-interest The auditors‟ own personal interest, e.g the auditors may fear the loss of fees - Self-review When carrying out the audit, the auditors, review work that their own firm has undertaken previously, e.g preparing accounts or making a valuation -Advocacy If the auditors get involved in disputes concerning the client, they may end up acting for or against the client, which undermines the appearance of objectivity -Familiarity If the auditors are involved with the client for a long time, they may become unduly sympathetic towards directors and management and thus too inclined to trust their unsupported word -Intimidation The auditors may be intimidated by a dominant or aggressive atmosphere at the client For example : the audit firm owns shares in the client, or is a trustee of a trust that holds shares in the client Question 13: Auditors must compliance the accounting standards when they perform the audit Right or Wrong? Explain Right Because : Auditing standards set standards for the auditor's work in the audit process to achieve the auditor's overall goals Auditing Standards specify and guide the auditor's general responsibilities, as well as the issues the auditor should consider when performing his responsibilities in the particular circumstances Question 14: What is audit report? Explain why auditors’reports are important to users of FSs The auditor's report is a formal opinion, or disclaimer thereof, issued by either an internal auditor or an independent external auditor as a result of an internal or external audit, as an assurance service in order for the user to make decisions based on the results of the audit The auditor's report is a written letter from the auditor containing the opinion of whether a company's financial statements comply with generally accepted accounting principles (GAAP) The independent and external audit report is typically published with the company's annual report auditors‟reports are important to users of FSs because : Auditors' reports are important to users of financial statements because they inform users of the auditor's opinion as to whether or not the financial statements are fairly stated or whether no conclusion can be made with regard to the fairness of their presentation -The goal of an auditor's report is to document reasonable assurance that a company's financial statements are free from error Along with balance sheets, profit & loss statements, and directors reports, auditor's reports make up part of a company's statutory accounts Question 15: List the content of the financial statement audit report of independent auditor Content of the financial statement audit report of independent auditor: An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation 10 Collusion between collectives and individuals with collectives and individuals inside and outside the business - Ignorance - The comprehension of the assigned task or job is not yet clear, subjective, and disregarded The above reasons make the internal control system always have inherent limitations, or control risk is unavoidable at businesses Why the external auditor need to understand the client’s internal control when implement the financial statements audit? The reasons why the external auditor understand the internal control The auditor must understand the entity’s internal control to consider how internal control design and operate to determine the audit works In the context of audit of financial statements, “an understanding of internal control assist the auditor in identifying types of potential misstatements and factors that affect the risks of material misstatements, and in designing the nature, timing, and extent of futher audit procedure” In the performance audit, in order to assess the risk of fraud, the auditor should obtain an understanding of relevant internal control to examine whether there are signs of irregularities that hamper performance, the entity’s action to address any recommendations to reduce fraud In the performance audit, the auditor understand the internal control to identify types of control which the auditor focused on and assesses the risk that they may not prevent or detect material control are in harmony with control environment so as to ensure compliance with the authorities in all material respects Identify the components of internal control 24  The control enviroment o Demonstrates commitment to interfrity and ethical values o Exercises oversight responsibility o Establishes structure, authority and responsibility o Demonstrates commitment to competence o Enforces accountability  Risk assessment o Identify business risks relevant to financial reporting objectives o Estimating the significance of the risk o Assessing the likelihood of their occurrence o Deciding on actions to address those risks  Control activitites o Authorization o Performance review o Information processing o Physical controls o Segregation of duties  Information and communication The information system relevant to financial reporting is a component of IC that includes financial reporting system, and consists of the procedures and records established to initiate, record, process and report entity transactions (as well as events and conditions) and to maintain accountability for the related assets, liabilities and equity  Monitoring of controls Monitoring of controls is a process to assess the effectiveness of internal control performance over time It includes: - assessing the design and operation of controls on a timely basis and; - taking necessary corrective actions modified for changes in conditions List the internal control principles and give the example for each principle 25 - The principles of internal control are the concepts that require management to set procedures in place to ensure company assets are safeguarded In other words, these are the principles management uses to establish the ways to protect company assets - The main internal control principles include:  Establish Responsibilities  Maintain Records  Insure Assets by Bonding Key Employees  Segregate of Duties  Mandatory Employee Rotation  Split Related Party Responsibility  Use Technological Controls  Perform Regular Independent Reviews - The subject of internal controls is always expanding and this list of principles will probably expand in the future as well This is just a list of the most common and influential ones That being said, these principles are the basis by which management uses to create and implement the internal controls it establishes In other words, these are the basic ideas of controls They aren’t controls in and other themselves Management must take these ideas and apply them to their specific business Let’s take a look at an example Example: Segregation of duties is one of the most recognizable and common controls in most organizations, so we will look at that one It’s a good control to make sure that the recording and record keeping functions are separate from the actual handling of cash This is why the cashier is in charge of collecting cash from customers and possibility delivering it to the bank deposit box The bookkeeper or the accounting department is in charge of recording the cash receipts and doing the bank reconciliations 26 This way one single person can’t take the money from the customer, embezzle it, and cover up the thief with fraudulent bookkeeping If two people perform these jobs, the only way fraud will be able to work is if each person is in collusion with the other Obviously, two colluding employees are far less likely than a single employee stealing This is just one example of how the segregation of duties principle can be applied to a company’s internal controls procedures What is the audit evidence? Define the requirements of audit evidence  Definition: Audit evidence (AE) means the documentation, information which is obtained by the auditor in connection with the audit and on which the audit opinion is based  Classification of AE: AE can be classified in ways: (1) By its nature: documentary or oral (2) By its source: + Auditor-generated evidence + External evidence (third party) + Information produced by the entity  requirements of the AE: (1) Appropriateness: Appropriateness of evidence is the measure of the quantity of audit evidence It include: the reliability (from sources) and the relevance (with the audit objective) + Reliability of Evidence: refers to the degree to which evidence can be believable or worthy of trust + Relevance of Evidence: Evidence must pertain to or be relevant to the audit objective that the auditor is testing before it can be appropriate (2) Sufficiency: Sufficiency is the measure of the quantity of evidence obtained 27 The following statements are true or false? Why? (1) Audit firm may discontinue serving a client because of management’s integrity problems (2) Sufficiency is the measure of the quality of evidence obtained in an audit List the characteristics of reliable evidence External Auditor Entity Written Originals Audit evidence from external sources is more reliable than that obtain from the entity’s record because it is from an independent source Evidence obtained directly by auditors is more reliable than that obtained indirectly or by inference Evidence obtained from the entity’s records is more reliable when the related control system operates effectively Evidence in the form of documents (paper or electronic) or written representations is more reliable than oral representations, since oral representations can be retracted Original documents are more reliable than photocopies or facsimiles, which can easily be altered by the client 10 What does the auditor need to perform the audit procedures to obtain audit evidence? The auditor can obtain audit evidence through the following procedures: Inspection of tangible assets Inspection of documentation Inspection of tangible assets that are recorded in the accounting records confirms existence, but doesn’t necessarily confirm right and obligations or valution Confirmation that assets seen are recorded in accounting records gives evidence of completeness This is the examnination of documents and records, both internal and external, in paper, electronic or orther forms This 28 or records Observation Inquiry is procedure provides evidence of varying reliability, depending on the nature, source and effectiveness of controls over production Inspection can provide evidence of existence, but not necessarily of ownership or value This involves watching a procedure or process being performed It is of limited use, as it only confirms the procedure took place when the auditor was watching, and because the act of being observed could affect how the procedure or process was performed It is the obtaining of written or oral information from the client in response to questions from the auditor Confirmation This is process of obtaining a representation of information or of an existing condition directly frim a third party Recalculation It involves rechecking a sample of calculations made by the client It is the auditor’s independent tests of client accounting procedures or controls that were originally done  Understand the client’s industry and business  Assess the entity’s ability to continue as a going concern  Indicate the presence of possible misstatements in the financial statements  Reduce detailed audit tests Reperformance Analytical procedures 11 Why the auditors need to test financial statements assertions? - Management assertion is the explanation or assertion of managers to prove the data presented in the financial statements Assertions are formed from managers' responsibility for the preparation, presentation and disclosure of financial statements in accordance with applicable accounting standards or regimes - Audit Assertions are the implicit or explicit claims and representations made by the management responsible for the preparation of financial 29 statements regarding the appropriateness of the various elements of financial statements and disclosures 12 What are tests of detail? Give specific audit objectives relating to test of detail of transactions Tests of details are used by auditors to collect evidence that the balances, disclosures, and underlying transactions associated with a client's financial statements are correct a Cash disbursements are recorded for the amount of goods or services received and accurately recorded b Cash disbursements are included in an overall account payable and accurately summarized c Cash disbursements are recognized for goods and services actually received d Cash disbursement transactions are correctly classified e Current cash disbursements are recorded f Cash disbursements are recorded on the correct date 13 Distinguish preliminary analytical procedures and substantive analytical procedures Preliminary analytical Substantive analytical procedures procedures Preliminary analytical reviews Substantive procedures (or are performed to obtain an substantive tests) are those understanding of the activities performed by the business and its environment auditor to detect material Definine (eg financial performance misstatement at the relative to prior years and assertion level relevant industry and comparison groups), to help 30 assess the risk of material misstatement in order to determine the nature, timing and extent of audit Purposes of analytical procedures - Preliminary analytical review – risk assessment (required by ISA 315) -Preliminary analytical reviews are performed to obtain an understanding of the business and its environment - Substantive analytical procedures Analytical procedures are used as substantive procedures when the auditor considers that the use of analytical procedures can be more effective or efficient than tests of details in reducing the risk of material misstatements at the assertion level to an acceptably low level - Final analytical review (required by ISA 520) Analytical procedures are performed as an overall review of the financial statements at the end of the 31 - Determine the suitability of specific baseline analysis procedures for certain assertions, taking into account the assessed risk of material misstatement and detailed checks (if any) ) to these assertions - Assessing the reliability of the data used by the auditor to estimate the recorded figures and rates, including consideration of origin, comparability, content, and appropriateness of information available, and controls over information creation - Determine the value of any acceptable difference between the unit data recorded and the estimated value without the need for Steps audit to assess whether they are consistent with the auditor’s understanding of the entity Final analytical procedures are not conducted to obtain additional substantive assurance If irregularities are found, risk assessment should be performed again to consider any additional audit procedures are necessary Develop an independent expectation Define a significant difference Compute difference Investigate significant differences and draw conclusions further investigation as specified - Estimates of the metrics, rates recorded, and evaluation of whether the estimate is accurate enough to identify an error that, when considered alone or combined with other errors, could cause the financial report to is the main error or not Build an independent estimation model Collect independent data and calculate the value of the estimated model Determine an acceptance error threshold Determine the value of the difference and find out the cause of the difference 14 The following statements are true or false? Why? (1) Performing the review analytical procedures in the final phase of the audit is required 32 Analytical procedures are performed as an overall review of the financial statements at the end of the audit to assess whether they are consistent with the auditor's understanding of the entity Final analytical procedures are not conducted to obtain additional substantive assurance (2) Test of control are designed to detect material misstatement in the FSs 15 Present the definition of audit methodology Simply put, procedures are defined on the basis of the methodology adopted by the auditor Approach/methodology will determine what needs to be found, done or executed whereas, procedures are the tasks that will find, or execute what was determined in accordance with the approach 16 What is the difference between audit methods and audit procedures? Criteria Audit methods Audit procerdures -An audit method is a method -Audit Procedure is something in which audit procedures and an auditor does or should techniques are designed to in order to audit obtain evidence of the -An audit procedure is specific adequacy or effectiveness of work performed by the Denifition the firm's internal control auditor to obtain an identified system audit evidence associated with the audit objective Classify a Document audit method b Auditing methods out 33 c Risk assessment procedures d Procedures for checking of documents Featured operation control e Basic audit procedures : - There are three basic audit procedures including: Professional detailed inspection; Analytical procedures; Detailed balance checking procedures - All testing, analysis and evaluation of auditors are based on data and information in the financial statements and provided by the accounting system - identify audit procedures to obtain reliable evidence, to gain a certain understanding of audit risk at least cost 17 Present the procedures to assess risk in the planning phase Five Steps of the Risk Management Process      Step 1: Identify the Risk The first step is to identify the risks that the business is exposed to in its operating environment Step 2: Analyze the Risk Step 3: Evaluate or Rank the Risk Step 4: Treat the Risk Step 5: Monitor and Review the Risk 18 Distinguish between test of control and substantive procedures (base on following criteria: definition, characteristics, applying condition and used techniques) 34 Criteria Denifition Characteristics Test of control Test of controls is An audit procedure designed to evaluate the effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level prevent, or detect and repair material flaws at the data base level - The managers of the business are honest and trustworthy - Audited entities are enterprises with strong and effective internal control systems Applying condition Used techniques - Auditing for many consecutive years of the unit did not have traces of serious violations  Observe  Examine documents 35 Substantive procedures An audit procedure designed to detect errors material shortcomings at the database level Collect evidence to detect material flaws that affect the financial statements - The content and extent of the auditor's examination of the entries and other adjustments depend on the nature and complexity of the entity's financial reporting process and the risks of material misstatement Involve - Audit evidence from baseline trials obtained from a previous audit provides little evidence for the current audit  Basic analytical procedures;  interview  Check details (transaction groups, account balances and information present) 19 Clarify the term “organization of the auditing process” Audit planning and preparation: Audit preparation consists of planning everything that is done in advance by interested parties, such as the auditor, the lead auditor, the client, and the audit program manager, to ensure that the audit complies with the client’s objective This stage of an audit begins with the decision to conduct the audit and ends when the audit itself begins Audit execution: The execution phase of an audit is often called the fieldwork It is the data-gathering portion of the audit and covers the time period from arrival at the audit location up to the exit meeting It consists of multiple activities including on-site audit management, meeting with the auditee, understanding the process and system controls and verifying that these controls work, communicating among team members, and communicating with the auditee Audit reporting: The purpose of the audit report is to communicate the results of the investigation The report should provide correct and clear data that will be effective as a management aid in addressing important organizational issues The audit process may end when the report is issued by the lead auditor or after follow-up actions are completed Audit follow-up and closure: According to ISO 19011, clause 6.6, "The audit is completed when all the planned audit activities have been carried out, or otherwise agreed with the audit client." Clause 6.7 of ISO 19011 continues by stating that verification of follow-up actions may be part of a subsequent audit 20 Identify the main working steps in FSs auditing process that auditors have to 36 perform when conducting an audit There are five phases of our audit process: Selection, Planning, Execution, Reporting, and Follow-Up Selection Phase Internal Audit conducts a University-wide risk assessment near the end of each calendar year We develop the audit plan for the subsequent year based on the results of this assessment and the department‟s available resources The Chancellor and the Fiscal Affairs and Audit Committee of the Kansas Board of Regents review the audit plan before it is executed Planning Phase During the planning phase of each project, the Internal Audit staff gather relevant background information and initiate contact with the client Auditors meet with University leadership and clients to identify risks and determine the objectives and scope of the audit as well as the timing of fieldwork and the report distribution Execution Phase Once the audit is planned, fieldwork is executed by the Internal Audit staff Clients are kept informed of the audit process through regular status meetings We discuss audit observations, potential findings, and recommendations with the client as they are identified Reporting Phase A summary of the audit findings, conclusions, and specific recommendations are officially communicated to the client through a draft report Clients have the opportunity to respond to the report and submit an action plan and time frame These responses become part of the final report which is distributed to the appropriate level of administration Follow-Up Internal Audit follows up on all audit findings within one year of when the report was issued 37 38 ... According to ISO 19 011 , clause 6.6, "The audit is completed when all the planned audit activities have been carried out, or otherwise agreed with the audit client." Clause 6.7 of ISO 19 011 continues... related parties to co-operate in auditing process and issuing audited results + The relationship between national and international auditing standards + The content and legal form of standards on auditing. .. constituent parts of the financial statements Particulalr assertions: Transactions and Account Balances Presentation and Events Disclosure Occurrence Existence Occurrence and rights and obligations 13