Question

Elaborate on the following Chapter 1 points:

1: Understand the basic purpose of a financial statement audit

2: Identify the attributes of assurance services

3: Identify when evidence is reliable

4: Understand the concept of audit risk

5: Understand what an auditor must do if he or she does not possess the expertise in the client’s industry or sector

6: Understand what an integrated audit means when the client is a public company

7: Understand what the term ‘systematic process’ means

Answer 1

1) The main purpose of a financial statement audit:

• To check whether financial statements are prepared in accordance with the accounting standards.
• To verify the existence, ownership and title of assets.
• Determine the nature and extent of liability.
• For year end scrutiny.
• To check existence and effectiveness of controls that are placed to prevent any misstatement in financial statements.
• Audit increase users confidence in the financial statement as it provide reasonable assurance on the accuracy of financial statement.

2) Different attributes of assurance services are:

• Quality of information being reported.
• That the process is effective.
• That all the compliance with different legal framework is taken care.

3) The evidence is reliable :

• Depends upon the nature, source and circumstances under which it is obtained.
• Evidences are reliable when the controls on such information are effective.
• When directly obtained by auditors.
• When evidence is obtained from direct sources for example evidence obtained from original document.
• When it is obtained from an independent source.

4) The concept of audit risk:

Audit risk is the risk that the financial statements will be issued with material errors even though it is audited. It is a risk that an auditor may issue an inappropriate opinion on financial statement. Audit risk is also known as residual risk. Audit risk has three components:

• Control Risk: This is a risk that controls used by business is not effective enough to avoid financial statement being materially misstated.
• Detection Risk: It is a risk that auditor might not detect a misstatement.
• Inherent Risk: This is a risk that auditor will himself conclude that financial statements are misstated.

To reduce the level of audit risk auditor can increase the number of audit procedures.

5) If an auditor does not possess the expertise in the client’s industry or sector he should ensure that there is adequate evidence to show that competence has been considered, and should take necessary steps to improve those competencies. He can use auditor's expert to obtain audit evidence. He should provide adequate training to its staff.

6) Integrated audit means audit of financial statement along with audit of internal controls. Management are responsible for reporting on an internal control structure which is further assessed by auditors. The main objective of Integrated audit is for auditor to express his opinion on controls on financial reporting.

A public company is required to get integrated auditing done. Integrated audit can only be performed by CPAs. While filing the annual report public company are required to include an internal control report. CPA firms auditing companies with a market capitalization more than $75 million are required to express an opinion on managements internal control report. While doing integrated audit auditors need to use same method that was used by management to determine the effectiveness of internal controls.

7) The term ‘systematic process’ is a approach to accomplish goal or task . Systematic process is associated with critical thinking. It is a means used by management to reduce the number and severity of mistakes, and failures due to human functions involved.