audit questions

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audit questions
2015-10-20 06:00:07
audit questions

audit questions
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  1. What is the difference between external auditor and IA?
    • Relationship with management – role of IA determined by mgmt; EA is appointed to report independently on FS. The external auditor is independent of client and mgmt. in fact and in appearance
    • Function – IA: vary according to mgmt. requirements, develop improvements and induce compliance; EA: primary concern is whether FS is reliable and free from material misstatements.
    • Identity: IA: employee of the company; EA: performed by a practicing professional outside of company
    • Serving whom?: serve the needs of the company; EA: serve Sh
  2. From the perspective of the agency theory, explain with examples the reasons why managers have self-interested behavior rather than acting in the best interest of SH
    • Agency theory suggest...
    • Mangers can operate for their own interest due to information asymmetry
    • Examples *3
  3. Explain the nature of true and fair view
    • Faithful representation of FS items based on Conceptual Framework pf FR
    • Application of HKFRS, with additional disclosure
    • Selection and application of appropriate accounting policies
    • Relevant, reliable, objective, comparable and understandable
  4. How could agency risk lead to information risk?
    • Agency risk arises because there are conflict of interest between the agent and the principal
    • conflict of interest causes information risk because there are goal inconsistency
    • when information is obtained form others, the chances of it being misstated increases because of goal inconsistency; information may be biased in favor of mgmt.
    • mgmt. may produce FS than shows performance better than actual because (1)personal goal =/= org. goal (2) tempted by reward scheme that is based on financial performance (3) mgmt’s judgement about what is ethical or not is unclear
  5. How auditors can meet the demand of society for reliable information for intended users
    • Independence and objectivity
    • Professional competence
    • Access sufficient appropriate evidence
    • Compliance with standards and regulations
    • Professional skepticism
  6. Do you agree that auditing is a necessary evil to a company?
    • Legal requirement – company ordinance
    • Agency problem – separation of ownership and management; impractical to supervise actions; appoint auditors to review FS on their behalf
    • Conflict of interest - Directors have incentive to product FS
    • Directors have incentive to engage auditors to increase credibility of FS
    • In the interest of the capital market and market participants that information are true and fair
    • Auditors are liable – shareholders may sue auditors for compensation; like buying insurance
    • Independent audit – free from bias and manipulation
  7. Explain the nature of assurance engagement and the relationship between assurance engagement and auditing engagement
    • Def. of assurance service+5 elements
    • Reasonable assurance: risk reduced to acceptable low level; positive
    • Limited assurance: risk reduced to acceptable level; negative
    • Audit is a type of Reasonable assurance
    • Objective of audit: to obtain reasonable assurance and to report on FS based on auditor’s findings
  8. 5 elements of assurance engagement
    • EA, responsible party, intended users
    • Appropriate subject matter
    • Suitable criteria
    • Sufficient and appropriate evidence
    • Written assurance report
  9. What are the responsibilities of management for the FS and evaluate auditors’ responsibility
    • Adopt sound accounting policies
    • Internal control
    • Fair representation in FS
    • Ensure auditors have adequate information to do audit
    • Maintain proper books and records
  10. Special issues related to “notebook and photographic equipment” example and assertions: acquisition and disposal of assets are related to ….(3) assertion in BS and … in IS; capital expenditure and expense, financing and operating leases are related to …assertion in IS; for the notebook and photographic equipment are related to ….(3) assertions in BS
    • Occurrence, completeness and accuracy; rights and obligation;
    • Classification;
    • Existence, completeness, valuation and allocation
  11. People believe it is impossible to measure the components of audit risk model, hence impossible to use it in meaningful way. Discuss
    • Understanding of the relationship of different components in the audit risk model helps determine SA
    • Changes in components have an effect in amount of evidence and appropriate audit procedures, therefore model is meaningful
    • Example: direct/inverse, high IR and CR…
    • Precise measurement not required
  12. notebook and photographic equipment: what are the IR
    • high value and movable: high risk of loss(existence)
    • difficult to make estimates about useful lives;
    • valuation problem as no active market for old PCs
    • termination of course>equipment need to state at realizable value(valuation)
    • fast changing technology>obsolete (valuation)
    • application of capitalization policies for repair and maintenance require subjective requirement (classification)
    • replacement of components>capitalized or expensed?(classification)
  13. property example: what is the IR, why
    • low to medium
    • no indication of fraud
    • physical movement of inventory is rare
    • property not subject to misapporiation
  14. why is materiality difficult to apply
    • relative concept+the level of materiality required to reduce risk to acceptable level>requires professional judgement
    • many different users to FS>need to assess the likely user and the decisions they make
    • use qualitative factors, considering whether misstatements involve fraud, constractual obligation and impact on earnings trend
  15. Why do auditors needs to observe stock take
    • If inventory is material to FS
    • Inspect the existence and condition of the inventory
    • Observe compliance with management procedures for recording and controlling the result of the count
    • Obtain audit evidence as to the reliability of the management procedures
  16. Keywords of reliability: source of evidence, nature of evidence,
    • Directly from auditors, outside entity
    • Written/oral, limited to point of time, physical
    • Independent/objective; expertise
  17. Whats the significance of documentations
    • Assist the audit team to plan, perform, supervise and review the audit
    • Accountability
    • Enable conduct of QC inspections
    • Enable external inspections in accordance with regulatory requirements
    • Reference for future audits