Chapter 5
Q. Write down the overview of financial statement
audit.
Ans: Financial audit is the
examination of financial statements to express to an opinion on the truth and
fairness of financial condition. The overviews of financial statement audit are
as follows.
1.
The financial
statements are done on the basis of company’s policy.
2.
It is made on the
basis of generally accepted accounting principles.
3.
It has been done
by adequate books of account.
4.
It has done to
take proper statement for safeguarding the assts.
5.
It has done to
show proper profit and loss account.
6.
It has done to
show proper assets and liabilities.
7.
The auditor
should examine the liability position of the company.
8.
The auditor should examine the risky position
of the company.
Q. Identify the four phases of financial statement
audit.
Ans : The four phases of
financial statement audit are mentioned below.
1.
Accepting the audit engagement: The audit phase of financial statement audit involves
a decision to accept the opportunity to become the auditor for a new client or
to continue as auditor for existing client.
2.
Planning the audit: The second phases of the audit require the development of an audit
strategy for the conduct and scope of the audit. Planning is crucial to
successful audit engagement. Audit planning usually done from 3-6 months prior
to the client fiscal year.
3.
Performing audit tests: The third phase of the audit is performing audit
tests. This phase is also referred to as perfuming the field work because the
tests are usually done on the client premises. Audit tests are typically
performed from 3 to 4 months before to 1to 3 months after the end of client’s
fiscal year.
4.
Reporting the findings: The forth and final phase of audit is reporting the
findings. The audit report may be standard or there may be departure from the
standard report. The audit report is generally issued within 1to 3 weeks of
completing the field work.
Q. State the steps involved in accepting an audit
engagement.
Ans: The steps involved in accepting an audit
engagement are stated below:
1.
Evaluate integrity of management: Evaluate integrity of management is the primary
purpose of a financial statement audit is to express an opinion on management’s
financial statements.
2.
Identify special circumstances and unusual risks : Matters pertaining to this steps in accepting an
engagement includes identifying the intended users of the audited financial
statement.
3.
Assess competence to perform audit: The audit is to performed by a person or persons
having educate, technical training and proficiency as an auditor.
4.
Evaluate independence: In all matters relating to the assignment, independence
in mental attitude is to be maintained by the auditor.
5.
Determine ability to use due care : Due professional care is to be exercised in the
performance of the audit and the preparation of the report
6.
Preparing the engagement letter: As the final step in the acceptance phase, it is good
professional practice to confirm the term of each engagement in an engagement
letter.
Q. What do you
mean by audit planning?
Ans: Audit planning involves
the development of an overall strategy or game plan for the expected conduct
and scope of the audit. The amount of planning required in an engagement will
vary with the size and complexity of the client and auditor knowledge of an
experience with the clients.
Q. Discuss the steps in planning the audit?
Ans: There are six steps in
planning the audit those are stated below.
1.
Obtain
understanding of client business and industry.
2.
Perform
analytical procedure.
3.
Make preliminary judgments
about materiality levels.
4.
Consider about
risk.
5.
Develop preliminary
audit strategies for significant assertions.
6.
Obtain
understanding of clients internal control structure.
Chapter 6
Q. What is Materiality?
Ans: Materiality is an
essential consideration in determining the appropriate types of report for a
given of circumstances.
Materiality defines as—
A materiality in the financial
statement can be considered as material if the knowledge of misstatement would
affect the decision of the reasonable user of the financial statement.
Q. Write down the steps of applying materiality.
Ans : Materiality is an essential consideration in
determining the appropriate types of report for a given of circumstances. The
steps of applying materiality are as follows
1.
Set preliminary
judgment about materiality.
2.
Allocate
preliminary judgment about materiality segment.
3.
Estimate total
management in segment.
4.
Estimate the
combined misstatement.
5.
Compare the
combined estimate with the preliminary or revised judgment about materiality.
Q. State how the auditor arrives at preliminary
judgments about materiality at the financial statements and account balance
level.
Ans : The auditors make
preliminary judgments about materiality level in planning the audit. In the materiality
in the following two level.
1. Financial statement level: Financial
statements materiality is the minimum aggregate misstatement in the financial
statement that is importance enough to prevent the statement from being
presented fairly in conformity with GAAP. In this context, misstatement may
result from misapplication of GAAP, departure from facts and omission of
necessary information.
The auditor’s preliminary judgments about
materiality are often made six to nine months before the balance sheet date.
The financial statement data, In making preliminary determine aggregate level
of materiality for each statement.
Materiality judgments involved both
quantitative and qualitative consideration.
2. Account balance level: Account balance
materiality is the minimum misstatement that exists in an account balance and for,
it to be considered as, materially misstated.
In making judgment about
materiality at the account balance level the auditor must consider the
relationship between it and financial statement materiality. This consideration
should lead the auditor to plan the audit and to detect misstatement.
Q. What is audit Risk?
Ans : Audit risk is the risk
that the auditor unknowingly fail to appropriately modify his or her opinion on
the financial statement that are materially misstated.
In planning the audit the
auditor should consider the audit risk.
Q. Discuss the audit risk components.
Ans : There are three
components of audit risk .These are described below.
1.
Inherent Risk:
Inherent risk in the susceptibility of an assertion to a material misstatement,
assuming that there is no related internal control structure policies and
procedures.
2.
Control Risk:
Control risk is the risk that a material misstatement that occurs in an
assertion will not be prevented or detected on a timely basis by the entity’s
internal control structure policies or procedure.
3.
Detection Risk:
Detection risk is the that an auditor will not detect a material misstatement
that exists in an assertion.
The
auditor must consider the audit risk in planning and formulating the audit.
Q. State the relationship among the risk components. Express
audit risk model.
Ans : There is an inverse
relationship between assessed level of inherent and control risk for an assertion and the level of detection risk
that the auditor can accept for assertion. Thus the lower the assessment level
of inherent and control risk the higher the acceptable of detection risk.
The audit risk model express
the relationship among the risk components are as follows.
AR=IR*CR*DR
Here,
AR= Audit Risk
IR=Inherent Risk
CR= Control Risk
DR= Detection Risk
DR can be determined by
solving the model as follows.
DR=AR/IR*CR
To determine the planned detection risk for an
assertion CR is based on the auditors panned assessed level of control risk.
Q. State the interrelationship among materiality audit
risk and audit evidence.
Ans
: The
interrelationship among materiality audit risk and audit evidence are as
follow.
1.
There is an
inverse relationship between materiality and audit evidence.
2.
There is an
inverse relationship between materiality and audit risk and audit evidence.
3.
If we hold audit
risk constant and reduce materiality level , audit evidence must increase.
4.
If we hold
materiality level constant and reduce audit evidence ,audit risk must increase.
5.
Increase
materiality level while holding audit evidence constant.
6.
Increase audit
evidence while holding materiality level constant, or
7.
Make smaller increase
in both the amount in both the amount of audit evidence and materiality level.
Q. What are audit risk alerts?
Ans : Audit risk alerts are intended to provide
auditors with an overview of recent economic ,professional and regulatory
developments that may affect audits for clients in many industries
In addition to general audit risk
alerts, updates are issued covering developments related to specific
industries. Following are the three example of subject discussed in AICP’SM
audit risk alerts.
1.
Implication of an
account economics environment
2.
Regulatory
development.
3.
Now auditing and
attestation pronouncement.
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