The difference between between internal and external auditors
First of all, the difference between internal and external auditor is that the internal auditor is a part of organization while external auditor is engaged by it but not a part of organization. The internal auditor’s objectives are decided by the board, management and professional standards. It serves the organization by helping it accomplish its objectives, and improving operations, risk management, internal controls, and governance processes. Their priorities are the board and management. Their scope of work is also comprehensive. Other than that, they are also responsible to prevent any form of fraud.
The objectives of external auditor are set primarily by their primary client and statute which is the board of directors. The important work as external auditors is to give an independent opinion on the organization's financial statements.
(b) Internal control is the process designed and implemented by the senior managers of an organisation who are charged by the shareholders with effectively managing the organisation on their behalf. Five types of internal control are:
The control environment
The auditor should obtain a sufficient knowledge of the control environment to understand management’s and the board of director’s attitude, awareness and actions concerning the environment.
The entity’s risk assessment process
The auditor should obtain sufficient knowledge of the entity’s risk assessment process to understand how management considers and address risk relevant to financial reporting.
The information system
The auditor should obtain sufficient knowledge of the accounting information system to understand the classes of transactions that are significant to the financial statements.
The auditor should obtain an understanding of those control activities needed to plan the audit. Control activities that may be relevant to audit planning include performance reviews and information processing
The monitoring of controls
The auditor should obtain sufficient knowledge of the major types of activities that the entity uses to monitor internal control over financial reporting, including internal auditors.
ANSWER FOR QUESTION 2:
(a) Degree of disaggregation in the information available to the auditor, the availability and reliability of financial and non financial data, comparability of available information.
(b) Accounting Records - Check additions and cross-casts of the sales day book and sales returns day book. Check a sample of the postings of individual invoices to the GL and the control account. Check entries in the sales day book and sales returns day book to original invoices, credit notes and dispatch notes and vice versa.
Invoices and credit notes – Check numerical sequence of invoices and credit notes enquiring into missing numbers and inspecting copies of all cancelled invoices. Check calculations and additions of invoices and credit notes. Scrutinise credit notes for large ot unusual items.
Analytical procedures – Analyse and review fluctuations in sales levels
Cut off procedures – Identify and check large items in the last month and the first month of the next period.
ANSWER FOR QUESTION 3:
(a)(i) The auditor should evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time, not to exceed 1 year beyond the date of the financial statements being audited. However, the auditor is not required to design audit procedures specifically to identify conditions and events that indicate a “going concern” problem.
(b) Procedures required
The auditor should consider whether the results of his or her usual audit procedures indicate that there could be substantial “going concern” doubts. Id the auditor has substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time, he or she should obtain information about management’s plans to mitigate the problem, asses the likelihood of effective implementation of the plans, identify those elements that are especially significant to mitigating the going concern problem and should plan and perform auditing procedures to obtain evidential matter about those elements.
ANSWER FOR QUESTION 4:
(a) Audit planning means the auditor should plan the audit so that the engagement will be performed in an effective manner for example to assess and reduce risk that the financial statements may be misstated to an acceptable level, while risk assessment is a necessary step in a risk-based approach to audit is that the external auditors plan the audit around the risks that client’s Financial Statement may contain misstatements.
Inherent risk is the susceptibility of an account balance or class of transactions to material misstatement, either individually or when aggregated with misstatements in other balances or classes, irrespective of related internal controls.
Audit risk is the risk that auditors may give an inappropriate audit opinion on financial statements. Audit risk has three components which are detection risk, control risk and inherent risk.
Detection risk is the risk that auditors substantive procedures (tests of details of transactions and balances or analytical procedures) do not detect a misstatement that exists in an account balance or class of transactions that could be material, either individually or when aggregated with misstatements in other balances or classes.
Control risk is the risk that inaccurate statements could occur in class of transactions or an account balance and that could be material, either individually or when aggregated with misstatements in other classes or balances, would not be prevented, or detected and corrected on a timely basis, by the accounting and internal control systems.
(c) Before accept nomination from new client, there are procedures that should be considered. Ensure that there are no ethical issues which are a barrier to accepting nomination.
The significance of ethical threats should be evaluated. The firm should establish the facts and circumstances behind the proposed change so that they can decide whether it would be appropriate to accept the engagement. Ensure that the auditor is professionally qualified to act and there are no legal or technical barriers. Ensure that the existing resources are adequate in terms of staff, expertise and time to perform the engagement. Obtain references for the directors, if they are not known personally to the audit firm. Communicate directly with the existing/current auditor to establish facts and circumstances behind the proposed change.
ANSWER FOR QUESTION 5:
(b) Materiality is an expression of the relative significance or importance of a particular matter in the context of financial statements as a whole. A matter is material if its omission or misstatement could influence economic decisions of users of financial statements.
The concept of materiality is used by auditors to evaluate the impact of any error or omission in the financial statements and to determine how many and what items to sample in audit procedures.
(c) SELF INTEREST THREATS occur as a result of the financial or other interests of members/professional accountants or close family members.
SELF REVIEW THREATS occur when a previous judgement needs to be evaluated by the members or professional accountants responsible for the judgement.
ADVOCACY THREATS occur when members or professional accountants promote a position or opinion to the point that subsequent objectivity may be compromised. It is common for members to advocate their client’s position and it is not improper as long as misleading information is not provided.
FAMILIARITY THREATS occur when, because of a close relationship, members or professional accountants become too sympathetic to the interests of others.
INTIMIDATION THREATS occur when members or professional accountants may be deterred from acting objectively by threats, actual or perceived.
(d) SELF INTEREST THREATS occur as a result of the financial or other interests of members/professional accountants or close family members. FAMILIARITY THREATS occur when, because of a close relationship, members or professional accountants become too sympathetic to the interests of others.
(e) Safeguards created by the profession, legislation or regulations. For examples, educational, training and experience requirements for entry into the profession, continuing professional development requirements (CPD) and Professional Standards.
Safeguards in the work environment. For examples, recruitment procedures in the firm emphasizing the importance of employing high-calibre competent staff, appropriate disciplinary processes and consultation with another appropriate professional accountant.
Safeguards created by the individual. For example, maintaining contact with legal advisors and professional bodies
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