Assurance (Knowledge Level) 04th Chapter

Process of Assurance: Evidence and Reporting

01. What is the Objective of an assurance engagement? [P-70]

The objective of an assurance engagement is to enable the auditor to express an opinion whether the subject of
the assurance engagement is in accordance with the identified criteria.

02. What is Audit evidence? [P- 70]

Audit evidence is all of the information used by the auditor in arriving at the conclusions on which the audit
opinion is based.

03. What are the types of test of audit evidence? [P- 70]
There are potentially two types of test which they will carry out:
a. Tests of controls:
Performed to obtain audit evidence
Test effectiveness of controls
Detecting and correcting material misstatements at the assertion level.
b. Substantive procedures:
performed to detect material misstatements at the assertion level
Tests of detail of classes of transactions, account balances and disclosures.
Substantive analytical procedures.

04. Why do auditors carry out tests of controls and substantive procedures? [P- 71]
The logic is as follows.
a. Test of controls-
Submit a report correctly to the shareholders
Required to conclude to give a true and fair view.
Capable of producing financial statements which give a true and fair view.
Test the control system to assess whether it has operated to give a true and fair view.
b. Substantive Procedures-
Test its correctness

05. What are the sufficiency and appropriateness relating to audit evidence? [P- 71] [D-12(1a)]
'Sufficiency' and 'appropriateness' are interrelated and apply to both tests of controls and substantive
procedures.
Sufficiency is the measure of the quantity of audit evidence.
Appropriateness is the measure of the quality or reliability of the audit evidence.

06. Which audit evidence is reliable? [P- 71]

External sources- External audit evidence is more reliable than the entity's records.
Directly by auditor- Evidence obtained directly by auditors is more reliable than indirectly or by
inference.
Entitys records- Entity's records is more reliable when related control systems operate effectively.
Written documents- Written documents (paper or electronic) are more reliable than oral
representations
Original documents- Original documents are more reliable than photocopies or facsimiles.

07. What are financial statement assertions? [P- 72]

The representations by management, explicit or embodied in the financial statements.

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08. Why auditors use assertions which are given by directors relating to financial statements? [P- 72]
BSA 500 states that 'the auditor should use assertions for-
Classes of transactions,
Account balances, and
Presentation and disclosures

09. What are the management assertions? [P-72][J-12(8a)]

Assertions used by the auditor
classes of Occurrence: transactions and events that have been recorded have occurred and pertain
transactions to the entity.
Completeness: all transactions and events that should have been recorded have been
recorded.
Accuracy: amounts and other data relating to recorded transactions and events have been
recorded appropriately.
Cut-off: transactions and events have been recorded in the correct accounting period.
Classification: transactions and events have been recorded in the proper accounts.
Account Existence: assets, liabilities and equity interests exist.
balances Rights and obligations: the entity holds or controls the rights to assets, and liabilities are
the obligations of the entity.
Completeness: all assets, liabilities and equity interests that should have been recorded
have been recorded.
Valuation and allocation: assets, liabilities, and equity interests are included in the
financial statements at appropriate amounts and any resulting valuation or allocation
adjustments are appropriately recorded.
Presentation Occurrence and rights and obligations: disclosed events, transactions and other matters
and have occurred and pertain to the entity.
disclosure Completeness: all disclosures that should have been included in the financial statements
have been included.
Classification and understandability: financial information is appropriately presented
and described, and disclosures are clearly expressed.
Accuracy and valuation: financial and other information are disclosed fairly and at
appropriate amounts.

10. How auditor reduced audit risk to an acceptable level? [P- 73]
BSAs require that auditors determine overall responses to assessed risks at the financial statements level and
should design and perform further audit procedures to respond to assessed risks at the assertion level, so that
overall audit risk is reduced to an acceptably low level.

11. What are the substantive procedures that auditor must carry out? [P- 74]
In addition, the auditor must carry out the following substantive procedures:
Agreeing the financial statements to the underlying accounting records
Examining material journal entries
Examining other adjustments made in preparing the financial statements

12. What is audit opinion? How unqualified opinion is written? [P-75][D-12(2a)]

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13. What are the categories of substantive procedures how it is used? [P-74]
Substantive procedures fall into two categories:
Analytical procedures and
Other procedures.
The auditor must determine when it is appropriate to use which type of substantive procedure. Such as-
Analytical procedures tend to be appropriate for large volumes of predictable transactions (for
example, wages and salaries).
Other procedures (tests of detail) may be appropriate to gain information about account balances (for
example, inventories or trade receivables), particularly verifying the assertions of existence and
valuation.

14. What three things the auditors are required to state as explicit opinion in their audit report? [P- 76]
[D-12(2b)]
In respect of the state of the company's affairs at the end of the financial year
In respect of the company's profit or loss for the financial year
The information given in the directors' report is consistent with the financial statements

15. What are the matters with which the auditors imply satisfaction in an unqualified report under the
Companies Act 1994? [P- 76] [D-12(2c), 10(4a)]
The company has kept proper books of account with respect to:
i. All receipts and payments
ii. All sales and purchases of goods
iii. All assets and liabilities
iv. Records relating to production, process, distribution, wages and overhead

16. Which elements should be including in the audit report according to BSA 700? [P- 76][D-10(4a)]
According to BSA 700, the audit report should include the following basic elements, usually in the following
layout.
i. Title: Indicates the Auditors report is independent
ii. Addressee: To shareholder/director/member
iii. Introductory paragraph: Describe the subject matter and extent of audit of financial statements
iv. Managements Responsibility: Statement of management's responsibility for the financial statements
v. Auditors responsibility: Statement of the auditor's responsibility
vi. Scope of audit: Reference to the BSAs or other relevant standard
vii. Opinion paragraph: Express opinion relating to the financial statements
viii. Date of the report
ix. Auditor's address
x. Auditor's signature

17. How can we make the meaning of an unqualified audit report clear to the user? [P-77]
We can highlight some specific issues-
Misunderstanding of the nature of audited financial statements, for example that:
The balance sheet provides a fair valuation of the reporting entity.
The amounts in the financial statements are stated precisely.
The audited financial statements will guarantee that the entity concerned will continue to exist.
Misunderstanding as to the type and extent of work undertaken by auditors, for example that:
All items in financial statements are tested
Auditors will uncover all errors
Auditors should detect all fraud
Misunderstanding about the level of assurance provided by auditors, for example that:
The auditors provide absolute assurance that the figures in the financial statements are correct (ignoring
the concept of materiality and the problems of estimation).

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18. What are the components of assurance report under International Standard on assurance
engagement? [P- 78]
The international standard on assurance engagements requires that an assurance report must have the
following components:
i. Title: Indicates the Auditors report is independent
ii. Addressee: To shareholder/director/member
iii. Subject matter: Identify and describe the subject matter
iv. Identification of criteria
v. Inherent limitations: Description of any significant inherent limitations
vi. Suitable criteria: When the criteria used to evaluate or measure the subject matter are available only to
specific intended users, or are relevant only to a specific purpose, a statement restricting the use of the
assurance report to those intended users or that purpose
vii. Responsibility: Responsibilities of the responsible party and the practitioner
viii. Comply ISAEs: A statement that the engagement was performed in accordance with International
Standards on Assurance Engagements (ISAEs)
ix. A summary of the work performed: For limited assurance
x. The practitioner's conclusion: Conclusion may positive or negative
xi. Date of the report
xii. Auditors address

19. State various factors that help the auditor to ascertain as to what is sufficient appropriate audit
evidence. [D-12(1a)]

20. Discuss the attributes of audit evidence. [J-12(2a)]

***Others:
01. What is an unqualified review report opinion?
Base on our review, nothing has come to our attention that causes us to believe that the accompanying
financial statements do not give a true and fair view in accordance with identified financial reporting
framework.

02. Describe the few example of substantive procedure?

The auditor must always carry out substantive test procedure on the material items as follows:
Agreeing the financial statements to the underlying accounting records;
Examine other material journal entries
Examine other adjustments made in preparing the financial statements.
Substantive procedures fall into two categories. Those are:
Analytical procedure and
Other procedures.

03. What are the audit procedures for obtaining audit evidences?
The auditor obtains audit evidence to draw reasonable conclusion on which to base the audit opinion by
performing audit procedures to:
Risk assessment procedure
Test of controls
Substantive procedures
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Interactive question 1: Types of procedure [Difficulty level: Easy]

For each of the following statements, indicate whether they are true or false.

Tests of controls are tests designed to give evidence whether the controls in a company are operating
effectively or not.

True
False
Analytical procedures are a type of substantive procedure.

True
False

Interactive question 2: Audit report [D-10(4b)] [Difficulty level: Easy]

Which three of the following are implied opinions given in the audit report?

All information and explanations required for the audit have been received
Proper accounting records have been kept
The directors report is consistent with the financial statements
The financial statements have been properly prepared in accordance with the Companies Act 1985
The preparation of the financial statements is the responsibility of the companys management

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