Question

Question 3 (20 marks)

The following statements relate to general principles or terms used in the audit of financial statements. Identify two errors from each of the following statements (a)-(e) and explain briefly why these are errors or suggest corrections.

(a) The objective of an audit of financial statements is to enable auditors to give a true and correct view in all respects in accordance with Hong Kong Auditing Standards.

(b) Fraud refers to an unintentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. The primary responsibility for the prevention and detection of fraud rests with the auditors.

(c) Audit report – limitation in the scope of auditors’ work
When there has been a limitation in the scope of the auditors’ work thatprevents them from obtaining sufficient evidence to express an unmodified opinion, the auditors should issue a modified (except for disagreement) opinion when the effect of the limitation is not so material or pervasive as to require a disclaimer, and the wording of the opinion should indicate that it is qualified as to the possible adjustments to the audit fee that might have been determined to be necessary had the limitation not existed.

(d) When auditing accounts receivable, the auditor should obtain evidence to check the management assertion of cut-off to ensure the accounts receivable balance is 100% correct.

(e) Audit working papers are the property of the audit client and they can be used as a substitute for the company’s accounting records in case theaccounting records are destroyed.

Answer 1

a) The objective of an audit of financial statements is to enable auditors to give a true and fair view in all respects in accordance with IFAC.

Explanation:- An auditor cannot give a true and correct view on the financial statement. The word "fair" means financial statements present the information faithfully without any element of bias. Hence the auditor gives fair view and not correct view on the financial statements. And this statement is in accordance with IFAC.  

b) Fraud refers to an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. The primary responsibility for the prevention and detection of fraud rests with the Management.

Explanation:- Fraud is not an unintentional act, it is intentional. Misstatements in the books of accounts resulting from the unintentional act are called as errors and not a fraud.

As per standards of auditing the primary responsibility of detecting the fraud rests with management and not an auditor.

c) Audit report – limitation in the scope of auditors’ work
When there has been a limitation in the scope of the auditors’ work that prevents them from obtaining sufficient evidence to express an unmodified opinion, the auditors should disclaim an opinion, and he should conclude that possible effects on the financial statements of undetected misstatements could be both material and pervasive.

Wordings of the disclaimer of opinion should state that the

• Because of the significance of the matter describes in the basis for disclaimer of opinion section, the auditor has not been able to obtain sufficient and appropriate audit evidence to provide basis for audit evidence.

• Auditor does not express an opinion on the accompanying financial statements

d) When auditing accounts receivable, the auditor should obtain evidence to check the management assertion of cut-off to ensure the accounts receivable balance is 100% correct.

Explanation:- Here we can say that this statement is partly correct and not wholly. Since the auditor make the est to management to provide assertion that they made for cut-off to ensure the completeness of debtors. Referring only the cut-off assertion the auditor cannot conclude that the account receivables are 100% correct.

(e) Audit working papers are the property of the audit client and they can be used as a substitute for the company’s accounting records in case the accounting records are destroyed.

Explanation:- The audit working papers are the property of auditor. And they cannot be used as a substitute for companies accounting records in case the accounting records are destroyed.

Note:- Here I inserted the corrected terms in bold form.