ISA 200 Overall Objectives of an Auditor

Question 1

What are different types of Frameworks.

Answer 1

1. General Purpose
2. Special Purpose
3. Fair presentation Framework
4. Compliance Framework.

Question 2

Give some examples of General Purpose Frameworks.

Answer 2

1. IFRS
2. IFRS for SMEs
3. National Framework (or Financial Reporting Framework of Jurisdiction X) e.g. US GAAP
4. XYZ Law of Jurisdiction X

Question 3

Give some examples of Special Purpose Frameworks.

Answer 3

1. Regulatory Basis
2. Tax Basis
3. Cash Basis
4. Contractual Basis

Question 4

What will be impact on audit report if management uses Special Purpose Framework:

Answer 4

1. Emphasis of Matter Paragraph in report (to explain basis of accounting)
2. Other Matter Paragraph in report (to restrict distribution of report, if necessary)

Question 5

How auditor’s opinion is expressed in Fair Presentation Framework?

Answer 5

1. “financial statements give true and fair view in accordance with the framework”, or
2. “financial statements are presented fairly, in all material respects, in accordance with the framework”.

(Both phrases are equivalent)

Question 6

How auditor’s opinion is expressed in Compliance Framework?

Answer 6

“financial statements are prepared, in all material respects, in accordance with the framework”.

Question 7

What shall be auditor’s course of action if Compliance framework is misleading/not acceptable.

Answer 7

Request management to change framework. If not changed, auditor shall not accept engagement (unless required by law).

Question 8

Management describes AFRF in following terms “Financial statements are in substantial compliance with IFRS”. Is it acceptable?

Answer 8

No, as it is partial compliance (qualifying/limiting language) of AFRF.

Question 9

What is the difference between Management and TCWG?

Answer 9

• Management = persons responsible for conduct of entity’s operations (e.g. CFO, CEO).
• TCWG = persons responsible for Overseeing the strategic direction and Accountability (e.g. Directors).
• In some entities, Management and TCWG may be same.

Question 10

What are management’s responsibilities in an audit?

Answer 10

• For preparation of financial statements in accordance with AFRF
• For design and implementation of internal controls;
• To provide auditor relevant information.

Question 11

What are auditor’s overall objectives in an audit?

Answer 11

• To obtain reasonable assurance whether financial statements are free from material misstatement, and
• To report on the financial statements, and
• To communicate as required by the ISAs in accordance with the auditor’s findings.

Question 12

List some major stakeholders/users of an assurance report.

Answer 12

• Existing or Prospective Shareholders.
• A holding company.
• Lenders.
• Donors.
• Tax Authorities.

Question 13

List some common examples of expectation gap.

Answer 13

1. Auditor prepares financial statements.
2. Auditor checks 100% transactions of entity.
3. Auditor provides absolute assurance (i.e. he certifies or guarantees).
4. Auditor is responsible to detect fraud.
5. Auditor expresses opinion on internal controls.
6. Emphasis of Matter, Other Matter Paragraph, and Material Uncertainty related to Going Concern Paragraph are modified opinions.

Question 14

What is included (and not included) in the scope of audit.

Answer 14

Scope of audit includes expressing opinion on Financial Statements. It may also include opinion on other matters (if required by local laws).

Scope of audit does not include assurance on future viability of entity, or efficiency/effectiveness of management.

Question 15

What are different levels of assurance.

Answer 15

1. Limited Assurance.
2. Reasonable Assurance.
3. Absolute Assurance (not provided to clients).

Question 16

Give an example of engagement in which limited assurance is provided?

Answer 16

Review of historical financial statements. (ISRE 2400, or ISRE 2410)

Question 17

Give an example of engagement in which reasonable assurance is provided?

Answer 17

Audit of historical financial statements. (ISA 200 – 700)

Question 18

State some Inherent Limitations of Audit?

Answer 18

1. Nature of financial statements (estimates, judgments and uncertainties are involved)
2. Nature of audit procedures (Not complete information, No legal powers, Fraud)
3. Time and Cost limitation
4. Other difficult matters/assertions (Related Parties, NOCLAR, Going Concern)

Question 19

What characteristics should Audit Evidence possess?

Answer 19

It must be Sufficient (a measure of Quantity), and Appropriate (a measure of Quality).

Question 20

What are different sources of audit evidence?

Answer 20

• Previous audits (provided it is still relevant).
• Acceptance and Continuance Procedures
• During the audit (inside or outside the entity)
• Using Others (e.g. Predecessor Auditor, Component Auditor, Internal Auditor, Service Auditor, Expert, Quality Control Reviewer)

Question 21

Define Audit Risk.

Answer 21

Risk that financial statements include material misstatement and auditor expresses unmodified opinion.

Audit risk is a product of Risk of Material Misstatement and Detection Risk.

Question 22

Define “Risk of Material Misstatement”.

Answer 22

The risk that the financial statements contain material misstatements prior to audit.

Question 23

What is the difference between Risk of material misstatement at F/S level and at Assertion level?

Answer 23

1. Risk at Financial Statement Level affects many assertions/areas.
2. Risk at Assertion Level affects specific assertion in an area.

Question 24

Give some examples of Inherent Risks:

Answer 24

Risk due to nature of entity and its transactions e.g.

1. Risk of theft in precious and portable inventory,
2. Areas where estimates are applied,
3. Risk of change in technology/fashion,

Question 25

Give some examples of Control Risks.

Answer 25

Risk due to weaknesses in internal control e.g. 1. No approval, 2. No Reconciliations, 3. No segregation of duties.

Question 26

How Detection risk can be reduced?

Answer 26

Detection risk can be reduced by: * Adequate planning * Assignment of competent personnel. * Application of professional skepticism * Supervision and review of work performed.

Question 27

Define Professional Judgment.

Answer 27

Professional Judgment is the application of Knowledge and Experience during an audit to reach an appropriate course of action.

Question 28

Define Professional Skepticism.

Answer 28

Professional skepticism is an attitude that includes: * a questioning mind, * being alert to conditions which indicate possible misstatement, and * critical assessment of audit evidence.

Question 29

Is Independence required in every professional engagement.

Answer 29

No. Independence is required only for assurance engagements (e.g. audit, review, other reasonable/limited assurance engagements). Independence is not required for non-assurance engagements. (e.g. Agreed upon procedures, Compilation engagements).

Question 30

Give some examples where an ISA or some of its requirements may not be relevant.

Answer 30

* ISA 600 (if client does not have components/subsidiaries). * ISA 610 (if client does not have internal audit function). * ISA 620 (if F/S do not involve use of expert). * ISA 402 (if client does not use service organization). * ISA 705 (if an auditor expresses unmodified opinion). * ISA 265 (if no significance deficiencies in internal control). * ISA 501 (if entity has no segments).

Question 31

Is it allowed to comply with local laws in addition to ISAs during an audit?

Answer 31

Yes.

Question 32

What is the process of developing and issuing a new ISAs.

Answer 32

1. Research and Consultation. 2. Exposure Draft to Public. 3. Comments. 4. Approval.

Question 33

What are Contents of an ISAs.

Answer 33

1. Introductory Material, 2. Objectives, 3. Definition. 4. Requirements. 5. Application and Other Explanatory Material 6. Appendices.