Question

For each case below use a firm of your choice, either real or of your own creation. Your are to write from the perspective who has just been hired to conduct and audit of the firm that is to begin soon.

Case Study #1

Using the firm you have chosen, outline a thorough outline for the audit that includes descriptions of particularly important issues to be dealt with along the way.

Case Study #2

Using the firm you are auditing, thoroughly outline the evidence you will gather. Explain the importance of each type and how you will gather and evaluate it.

Case Study #3

Outline and describe how you will decide issues of materiality and how these shall/should be reported, analyzed, and acted upon by the firm being audited.

Please use your own words and select a firm

Answer 1

Case Study #1

The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial statements are free from material misstatement due to fraud or error. This is because there are inherent limitations of an audit, which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive.

Issues,

The Nature of Financial Reporting: The preparation of financial statements involves judgment by management in applying the requirements of the entity’s applicable financial reporting framework to the facts and circumstances of the entity.

Timeliness of Financial Reporting and the Balance between Benefit and Cost: The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an audit procedure for which there is no alternative or to be satisfied with audit evidence that is less than persuasive.

Case Study #2

    Audit evidence may be defined as the information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial statements and other information.

Audit evidence is necessary to support the auditor’s opinion and report. It is cumulative in nature and is primarily obtained from audit procedures performed during the course of the audit. It may, however, also include information obtained from other sources such as previous audits. In addition to other sources inside and outside the entity, the entity’s accounting records are an important source of audit evidence. Sufficiency is the measure of the quantity of audit evidence. The quantity of audit evidence needed is affected by the auditor’s assessment of the risks of
misstatement.Appropriateness is the measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for the conclusions on
which the auditor’s opinion is based. The reliability of evidence is influenced by its source and
by its nature, and is dependent on the individual circumstances under which it is obtained.

Case Study #3        Materiality means Whether or not the knowledge of an item would influence the decisions of the users of the financial statements is dependent on the particular facts and circumstances of each case.Therefore, the decision to judge the materiality of the item whether in the aggregation of items, presentation or classification of items shall depend upon the judgment of preparers of the account in the circumstances of the particular case. In many cases percentage comparison may be useful in indicating the materiality of an item.