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MID TERM ASSIGNMENT
[DA 303 AUDIT AND ASSURANCE]
1Q:- State the purpose of an Engagement Letter?
Ans: - Engagement Letter is an agreement in written between the Auditor and the Client. Engagement Letter includes:-
- Responsibilities of Directors.
- Responsibilities of an Auditor.
- Scope of an Auditor.
- Other Matters.
- Governing Law and Jurisdiction.
- Agreement of Terms.
The purpose of an Engagement Letter is to minimise the mis-understanding/Expectation Gap between the parties related to their roles/work.
2Q:- List all the matters that included within this Audit Engagement Letter?
Ans: - The matters that included within the Audit Engagement Letter are:-
- Responsibilities of Directors:- Under the Companies Act 1965, The Directors must maintain the Company’s accounting records and prepare the Annual Financial Statements in true and fair manner according to the standards.
The Directors must also provide Company’s Accounting Records and other records, including minutes of management and shareholder’s meetings when required. In order to obtain Audit Evidence directors must also provide full access to any person within the company.
Through the implementation of an adequate system of an internal control, it is the director’s responsibility to prevent and detect fraud and errors within the directors and management of the company.
- Responsibilities of an Auditor: - An Auditor must give his /her opinion on the financial statements that whether the statements are according to the standards or not.
Opinion on the financial position of the company at the end of the financial year; and
Opinion on the financial performance and cash flow of the company.
To consider whether proper accounting records and registers have been kept by the company.
To consider whether all the information obtained required for an audit.
To report in writing to the companies board, if there is any breach in any provision of the Act.
To report in writing if there is any fraud committed.
- Scope of an Auditors: - It includes to perform standards comply with ethics in audit as an assurance to see that all the financial statements are free of material misstatements.
An Auditor can run tests (walkthrough test) in order to check management internal control and accounting system.
It is not an auditors duty to find all major defects or frauds even though the audit is fully planned and prepared because of an inherent limitations of an audit but if happens the auditor will report to the management during the audit.
An Auditor can ask for any document, records in related to audit and looks for full cooperation of management.
- Confidentiality: - An Auditor is supposed to keep all information related to financial statements etc. confidential.
The written consent is required from the party related to which the information is going to disclose.
- Other Matters: - Any working papers and files created by an auditor for the engagement are property of an auditor only, including electronic documents.
- Governing Law and Jurisdiction: - This engagement letter shall be governed by the laws and if any dispute arises related to this engagement letter then it shall be subject to the jurisdiction of the courts.
- Fees: - The fees will be based upon the time spent on the work by partners and staff and the degree of responsibility. Before audit the audit fee will be fixed.
- Agreement of Terms: - If the management is agreed on these terms and conditions written in the engagement letter then this will remain effective from one to many audit appointments, until any changes takes place.
There is also a demand of confirmation in written with signature and copy of engagement letter in back from the management of a company.
3Q:- Why audit independence is important to an auditor?
Ans: - An auditor must be independent or seems to be an independent auditor because auditors are expected to give there honest and unbiased opinion on the financial statements to the shareholders of the company. If the auditor is not independent then he may not perform his task unbiasedly and this can lead to wrong opinion on the financial statements.
4Q:- What are those threats to independence?
Ans: - Threats to independence:-
- Self-Interest Threats: - These threats occurs When an auditor have an interest or benefit in the company. For ex: - When an auditor or any member of an auditor’s family owns shares in the company etc.
- Self-review Threats: - These threats occurs when an auditor have to review his own work done in the company. For ex: - As an accountant prepared financial statements for the company and then appointed as an auditor to audit the company.
- Advocacy Threats: - This threat arises when an auditor is advocating on behalf of or against the client or the company. For ex: - a friend of an auditor case a file in the court against the xyz co. and an auditor has a full details of that company and auditor helps his friend by providing that details against the company in the court.
- Familiarity Threats: - These threats arises when an auditor accepts the auditee’s point of view because of their familiarity or a close relationship let influenced his/her opinion. For ex: - An auditor have a family member who is the director of the company which an auditor is going to audit.
- Intimidation Threats: - These threats arises when an auditor is being forced or threatened to give an untrue opinion on the financial statements of the company which an auditor is auditing. For ex: - Threat of removal of an auditor from the companies auditing if didn’t provide the favourable opinion on the financial statements of the company.
5Q:- what governed auditor’s independent in New Zealand?
Ans: - The External Reporting Board (XRB) is the regulator which governs auditors in New Zealand under the Financial Reporting Act 1993.
Functions of XRB: -
- Develop and implement strategy for audit and assurance standards.
- Prepare and Issue accounting standards.
- Issue auditing and assurance standards with the professional and ethical standards.
- Work with national and international organisations performing functions as XRB.
NZICA makes sure that the auditors follows the standard and as an accredited body NZICA gives licence and registers the auditors and audit firm in new Zealand.
The FMA makes sure that the registered auditors follows minimum prescribed standards. The FMA gives licences and registers the auditors and audit firm which are overseas.
6Q:- How can Auditor safeguards themselves from independent threats?
Ans: - Safeguard comes into three categories: -
- Safeguard created by the profession, legislation or regulation: -
- For the entrance in auditing profession proper education, training and experience is required.
- Timely education seminars will be organised related to new laws and rules.
- Timely analysis of a quality control system by suitable external person.
- Safeguard within the audit clients: -
- Persons other than management should approve the appointment when the audit client’s management appoints the firm.
- In order to make decisions the audit client must have competent employees.
- There must be an audit committee to communicate regarding the audit firm’s services.
- Safeguards within the audit firm: -
- Identification of threats to auditor’s independence like self-interest, familiarity, self-review threats, advocacy and intimidation.
- Proper channel for staff to communicate with seniors within the firm related to any issue of independence and objectivity that concerns them.
- Involvement of an additional accountant to review the work done or an advice on the work done.
- Removal of an individual from the firm whose relationships or financial interests creates a threat to independence.
7Q:- In what circumstances is a company required to have an audit?
Ans: - Audit is a process in which an auditor analyses the entity’s accounts and gives his/her opinion that whether the accounts are true and fair, and they comply with generally accepted accounting practices (GAAP).
Circumstances in which a company is required to have an audit are:-
- Issuers: - Under the Financial Reporting Act 1993(FRA), the financial statements of every entity which is an ‘issuer’ needs to be audited.
Examples of an Issuers are: -
- Every entity including overseas entities and registered banks who allotted securities complied with the Securities Act 1978.
- Entities listed on the New Zealand Stock Exchange.
- Foreign Companies: - These companies need to appoint an auditor and have their financial statements audited.
Examples of a foreigner companies are: -
- Overseas Companies.
- Subsidiaries of an overseas companies.
- 25% or more of their votes are controlled by an overseas companies or subsidiaries.
- 25% or more of their votes controlled by a person who is a not ordinarily resident in New Zealand.
- Public Sector Entities: -Entities under The Public Audit Act 2001 (‘PAA’) needs to be audit.
Examples of Public Sector Entities: -
- Community trusts.
- Airport Companies.
- Local Authorities.
- Government departments.
- Other Entities: - Other types of entities also required to be audited. For ex: -
- Government funded Universities.
8Q:- Discuss the advantages of a company being audited. Be as convincing and comprehensive as possible?
Ans: - Advantages of a company being audited are: -
- Assurance to Shareholders: - With an audit, shareholders gets an assurance that the information in the accounts or financial statements is true and gives a fair view of point.
- Identifies weakness in the management control system: - With the audit not only about financial statements but the management also comes to know that whether their internal control system is going well or if there is any weakness or not.
- Loan: - The financial institutions like banks gives loans easily and at fair interest rates to the companies which are audited than the companies which are not audited.
- Profit or Loss: - With the auditing a management of the company gets to know about the financial position of the company that whether the company is in profit or not.
- Goodwill: - Auditing increases the goodwill of the company as it shows the profit made by and the financial position of the company.
- Past: - With the auditing, a company can compare its profits or losses in the present year with the previous year which leads them to future planning on how to run their business.
- Future: - With the auditing the management of the company gets to know about the future of the company. If the company is making profits then it is going concern or the company can run its business further but if the company is not making enough profits to cover all its costs or expenditure then it is not going concern or a company cannot run its business further properly in the future.
9Q:- What consequences can there be if an auditor does not comply with generally accepted auditing standards?
Ans: - If an auditor does not comply with generally accepted auditing standards then due to his/her negligence there will be the risk of material misstatement in the financial statement of the company which leads to the wrong opinion in the audit report related to company profit or loss and going concern.
10Q:- What four points does a plaintiff need to establish in order to successfully take action against the auditors for negligence?
Ans: - These are the four points: -
- Duty of care: - Under Contract law, An Auditor is liable to the company with whom in contract.
Under Tort law, An auditor is liable to third parties which have interest in auditors report and suffered loss due to negligence of auditor.
- Negligent: - A plaintiff can sue an auditor by proving that an auditor was negligent by showing a material misstatement in the audited financial statement.
- Loss Suffered: - A plaintiff needs to show the proof of loss suffered.
- Loss as a result of an auditor: - A plaintiff needs to prove that a loss was suffered due to reliance on audited material misstated financial statement.
11Q:- What are the major steps in the audit process?
Ans: - Major steps in the audit process are: -
- Understanding the Entity and the Environment: - It is an important step in order to identify the risks related to the Entity. If the auditor did not understand the entity and its environment then there will be the risk of material misstatement which can cause wrong opinion in the audit report.
- Understanding of the internal control: - Internal control is defined as the process in which the management follows rules and regulations in order to assure the company’s objectives. The better will be the internal control, the less will be the chances of material misstatement in the financial statements and less will be the chances of wrong opinion in the audit report.
- Assessing the risk of material misstatement: - The auditor must do risk assessment for the identification of the material misstatement and then make plans to assess those material misstatements so that the audit process goes well and provides true and fair opinion in the audit report.
- Developing responses to assesses risk: - The auditor needs to obtain sufficient audit evidence by developing responses related to assessed risk in order to reduce it like assignment of experienced staff, provide more supervision etc.
- Performing test of control: - The auditor must perform the test of control to obtain audit evidence in order to detect and correct the material misstatement. It includes: - inspection of documents, re-performance of control procedures etc.
- Performing Substantive /Major Procedures: - Substantive procedures are those procedures done by an auditor to detect material misstatements in the financial statements like carry out analytical review, test balances in detail, test transactions in detail etc.
- Completion and review: - After completion of audit process, the auditor should review the financial statements in order to ensure that they are true and fair.
12Q:- Should external auditors rely on works done by internal auditor?
Ans: - There are 4 points which an external auditor must consider before rely on work done by internal auditor.
- Objectivity: - The external auditor must check the independence of mind of internal auditor that during internal audit he/she was in any self-interest or in any pressure by the management before rely on internal auditors work.
- Technical competence: - Before relying on internal auditor’s work the external auditor must check that whether internal auditor is properly educated and trained.
- Due professional care: - Before relying on internal auditor’s work the external auditor must also check that the work done by internal auditor is properly planned, documented, supervised and reviewed.
- Effectiveness of communication: - the external auditor must also check that there is proper and effective communication between internal auditor and him/her before fully relying on internal auditor’s work.
13Q:- Explain the difference between the internal and external audit?
Ans: - Difference between the internal and external audit: -
The purpose of an internal audit is to improve the company’s operations like check the control system in the company whether it is implementing or not.
The purpose of the external auditor is to give opinion on the financial statements of the company.
The scope of the internal auditor is related to the operations of the company.
The scope of the external auditor is related with the financial statements of the company.
Internal auditors are commonly employees of the company but sometimes the internal audit is done by the auditor outside of the company.
External auditors are always independent of the company. They are appointed by the shareholders of the company.
Internal auditor reports to the management and the audit committee set up in the company.
External auditors only reports to the shareholders of the company.
Internal auditors only alert the management about the risk and fraud but prevention and detection is done by the management of the company
Prevention and detection of fraud is done by the management of the company.
14Q:- Explain the issue of the expectation gap?
Ans: - The expectation gap is defined as the gap or misconception in the minds of the general public related to the duties and responsibilities of the auditor.
Some major issues in the expectation gap are: -
- There is misunderstanding that an auditor must give an early warning of the corporate failure.
- It is an auditor’s duty to detect the fraud and mention it in the audit opinion.
- They expect the auditor to maintain accounts and deal with the tax issues.
- They expect the auditors to give 100% assurance on the audited financial statements that they are free from material misstatements.
15Q:- Name and briefly describe the components of the audit expectation gap that are concerned with auditor’s duties in the area of fraud?
Ans: - Components of the audit expectation gap are: -
- Deficient performance: - it is a misunderstanding in the mind of public and management related to the duties performed by the auditor.
- Deficient standards: - The gap between the actual responsibilities performed by the auditor under law and the expected standard by the society.
- Unreasonable expectation: - The expectation of society which is not reasonable for auditors under the law to perform.
There is a big misunderstanding that it is an auditor’s responsibility for the prevention and detection of fraud but in actual it is management’s responsibility to prevent and detect fraud through internal control.
16Q:- Discuss what practical measures have been taken to reduce the audit expectation gap related to fraud?
Ans: - Before auditing done by the auditor an engagement letter is written by the auditor to audit client relating to the responsibilities of both parties on which both parties sign as an agreement.
Seminars on professional education in which it becomes cleared that the responsibilities of auditors is limited like to make sure that there is no material misstatement in the financial statements due to fraud, not to detect the fraud and prevent it.
There been an improvement in auditing in order to assist the auditor identify the material misstatement due to fraud in the financial statement.
Seminars on Public education being performed so that the misunderstanding in the minds of public related to the duties and responsibilities of an auditor must be cleared.